Rising global risk appetite, increased hedging ratios, and renewed pressure from the Trump administration on the Fed are plenty of reasons for the US dollar to fall. However, could it simply be overvalued? Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- The US President has stepped up pressure on the Fed.
- Foreign investors have increased their appetite for hedging.
- The risk of currency interventions is rising.
- Long positions on the EUR/USD pair can be opened with targets of 1.1915 and 1.197.
Weekly Fundamental Forecast for Dollar
Donald Trump is once again threatening to fire Jerome Powell, whom he appointed as Fed chair during his first presidential term. Trump said he will have Powell removed from office if Powell stays on as a Fed governor after his successor is confirmed. Renewed pressure on the Federal Reserve will be yet another factor weakening the US dollar, alongside the de-escalation of the geopolitical conflict in the Middle East and rising global risk appetite.
The parallels are striking. The situation echoes the 1970s oil crisis, when the US administration wanted to trim interest rates, putting pressure on the Fed. However, Jerome Powell did not follow in Arthur Burns’ footsteps. Instead, the US president appointed a loyalist. According to Donald Trump, monetary policy will ease as soon as Kevin Warsh takes the helm of the central bank. Investors appear to have already priced in this scenario. They have ramped up sales of the US dollar, pushing EUR/USD quotes to the 1.18 level for the first time since late February.
Hedge Ratio on US Assets
Source: Bloomberg.
Meanwhile, Japanese Finance Minister Satsuki Katayama said after talks with her US counterpart that she was ready to intervene in currency markets. This signals that Scott Bessent does not oppose such a move. Is the United States preparing to revisit a coordinated intervention in the foreign exchange market similar to the Plaza Accord of 1985? Alongside rising hedging ratios on non-resident investments in US assets, this dynamic is driving the EUR/USD rate steadily higher, particularly as US stock indices continue to reach new record highs.
Investors have ample reasons to sell the US dollar. They appear largely unconcerned by high oil prices or their negative impact on the energy-import-dependent eurozone. At the same time, a growing view in the market is that the decline in the USD index reflects its prior overvaluation. According to Harvard University professors, the greenback is trading around 20% above its fair value. Historically, such conditions have been followed by prolonged periods of weakness lasting five to six years.
Bloomberg Dollar Spot Index (BBDXY)
Source: Bloomberg.
The current sell-off may signal the start of a long-term decline in the US dollar. In this environment, investors are increasingly eager to join the EUR/USD rally. FOMO, or fear of missing out, continues to push the pair higher. The only factor that could support bears is an escalation of tensions in the Middle East. However, the likelihood of such a scenario remains low.
Weekly Trading Plan for EUR/USD
Long positions on the EUR/USD opened at 1.164 and 1.1765 can be maintained and gradually increased. The price will likely climb further to 1.1915 and 1.197 if it breaks through the 1.183 resistance level.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
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 broker. 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 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
