USD: everything around is unreal. Forecast as of 18.07.2023

Forex News FX

When China's GDP is not growing as fast as expected, and the Bundesbank is not optimistic about the prospects for the German economy, the rise of EURUSD looks like an anomaly. However, it is actually logical. Let's discuss this topic and make up a trading plan.

Weekly US dollar fundamental forecast

The EURUSD rally may look overly fast, but it is natural. Pessimism in the market was replaced by optimism, which supported the euro and weakened the US dollar. For a long time, investors feared inflation anchoring at elevated levels and the start of a recession. As a result, long-term bond yields fell faster than short-term ones, and yield curve inversion reached multi-year highs. It has accurately predicted all seven previous recessions in the US economy, so it is extremely trustworthy. But the reality turned out to be different.

US yield curve dynamics

Source: Bloomberg.

According to Goldman Sachs, the dynamics of the yield curve in the current cycle is different from all the others, so there will be no recession. A lot of the negative has been priced into asset prices. Investors revised their views as soon as it became clear that inflation was rapidly moving towards the target, that the Fed would not need to tighten monetary policy as much as expected, and that a soft landing was possible. Pessimism has now been replaced by optimism, which pushed up the US stock indices and led to a decrease in treasuries yield. An ideal environment for the EURUSD rally.

Janet Yellen also doesn't believe in a recession. According to the US Treasury Secretary, a slowdown in China's GDP could create ripple effects for the global economy, but the recession is unlikely to start in the US. The Chinese factor and the slow recovery of the German economy are indeed cause for concern. However, investors believe in a brighter future.

China's problems are caused primarily by sluggish demand for manufactured goods abroad against the background of American and European consumers' focus on services. Secondly, due to the caution of households accumulating rather than spending pandemic incentives. Thirdly, due to a significant slowdown in business investment. Even though JP Morgan, Morgan Stanley, and Citigroup have lowered their forecast for 2023 China GDP to 5%, Forex believes that the situation will improve in the second half of the year. Markets rise on expectations, and EURUSD is no exception.

According to the Bundesbank, German GDP rose slightly in the second quarter after a technical recession at the turn of 2022 and 2023. However, further recovery will be weaker than indicated in June forecasts. Then the German central bank expected the economy to shrink by 0.3% by the end of this year.

Against the backdrop of a strong US economy, the vulnerability of China and Germany makes one think that what is happening is unrealistic, as if the EURUSD rally has dragged on too long. However, if we consider the optimism in the market, the picture changes. The situation in the US will worsen due to the impact of the Fed's monetary restrictions, while Asian and European data, on the contrary, will be positive. Why not buy the euro on rumors?

Weekly EURUSD trading plan

As the Fed and ECB meetings approach, the risks of EURUSD consolidation will increase. However, as long as the pair stays above 1.12, focus on purchases.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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