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As long as the U.S. economy remains stable and appears significantly stronger than its main competitors, such as the Eurozone and China, the U.S. dollar will remain in demand in the Forex market. Moreover, it has the potential to grow in the event of a decline in stock indices and a shift in expectations regarding the timing of the Federal Reserve's monetary policy easing, which could be delayed longer than anticipated by the financial markets. "Bears" on EUR/USD still have untapped potential, but their opponents are not sleeping either.
Surprisingly soft data on U.S. inflation, including a slowdown in CPI and PCE to 3%, as well as signs of declining wage pressure, convinced investors that there is no need to raise the federal funds rate in September. Derivatives estimate the chances of keeping borrowing costs at 5.5% at the next FOMC meeting at nearly 80%. The most likely scenario for a dovish pivot is considered to be May 2024. However, the chances of its implementation in March are fifty-fifty.
Dynamics of inflation and labor costs in the United States
The dynamics of inflation and labor costs in the U.S. are critical factors for the market, as the Federal Reserve's monetary policy is data-dependent. In particular, the ninth consecutive slowdown in the Purchasing Managers' Index in the manufacturing sector may increase the risks of early monetary policy easing and strengthen the positions of EUR/USD. On the contrary, positive data on U.S. employment for July will convince investors that the Fed will not make adjustments to its policy in March 2024. Nevertheless, the key event of the month is the release of U.S. inflation data for July, which will be published on August 10. It will determine whether the sharp slowdown in price growth is a temporary phenomenon or not.
According to Danske Bank, the pronounced discrepancy in economic growth between the U.S. and the Eurozone, as well as the resilience of the U.S. against the most aggressive monetary restriction by the Federal Reserve in decades, are bearish factors for EUR/USD. The bank predicts a decline in the quotes of the main currency pair to 1.06 in three months and 1.03 in six months.
Dynamics of business activity in the USA
Regarding the forecast, in my opinion, it appears overly aggressive. I believe not only in the soft landing of the U.S. economy but also in the recovery of China's and Eurozone's GDP. As a result, global economic growth will accelerate, supporting pro-cyclical currencies, including the euro. By the way, one of the signs that the United States will avoid a recession is a strong labor market. In three episodes of soft landings in 1965-1966, 1984-1985, and 1993-1995, the unemployment rate did not rise. On the contrary, in 11 cases of recession, the indicator increased by at least half a percent.
Technically, on the daily chart, EUR/USD is gaining momentum for a retracement. This was realized through a combination of the Three Indians and 1-2-3 patterns. Selling the currency pair from the level of 1.106 and below proved to be a wise decision. We continue to adhere to this strategy. Initial short targets are set at 1.089 and 1.084 levels.
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