Before the release of US inflation data, the currency market reacted to movements in Brent crude prices. Rising oil prices were seen as a sign of accelerating inflation and higher Fed interest rates. This strengthened the US dollar. Now things are different. Let’s discuss this topic and make a trading plan for EUR/USD.
The article covers the following subjects:
Major Takeaways
- European assets are being sold off.
- France faces a major budget challenge.
- The US dollar reacts to stock market movements.
- Selling EURUSD if the price fails to break above 1.128, 1.13, or 1.134 remains a relevant strategy.
Weekly Fundamental Forecast for Dollar
US Treasury yields are rising because of a strong US economy and expectations that the Fed will continue tightening monetary policy. European bond yields are rising because of protests in France and other European countries. Is there a difference? Absolutely! And this difference raises doubts about whether the EUR/USD rally can last.
The yield spread between French and German bonds has reached a two-week high and is approaching the 15-year peak recorded in early October. To keep its debt at the current level of approximately 120% of GDP, France would have to achieve something remarkable: keep its budget deficit below 2% of GDP for several consecutive years. It has not managed to do so since the 1970s.
French-German Bond Yield Spread
Source: Bloomberg.
The government aims to reduce the budget deficit to 5% of GDP by cutting spending by €43 billion. However, voters oppose these measures. People are taking to the streets to protest against the rising cost of living. The wave of discontent is spreading beyond France to Italy, Portugal, Belgium, and other eurozone countries.
Protests are slowing economic activity and boosting support for right-wing parties willing to confront the EU, potentially even leaving the currency bloc. The euro faces a double blow from slower GDP growth and rising Frexit risk. It is no surprise that European assets are being sold off so quickly. Yet EUR/USD is not falling. It is actually trying to rise! A paradox?
In fact, it is not France but the US stock market that is setting the tone in Forex. The sell-off in technology stocks during the week ending October 16 gave way to a rebound at the start of the new trading week. Investors bought the dip and started selling Treasury bonds. Why seek safe-haven assets when the Nasdaq 100 is doing well?
US Treasury Yields and the Nasdaq 100
Source: Bloomberg.
As a result, Treasury yields rose, supporting the US dollar and helping it recover. EURUSD fell. Then the Nasdaq 100 stumbled, Treasury yields followed it lower, and the euro launched another counterattack.
Oil no longer drives the foreign exchange market. US stock indices and American exceptionalism now drive the Forex market. Under normal circumstances, a decline in the S&P 500 and weaker global risk appetite would be seen as a signal to buy the US dollar as a safe-haven currency. But not today.
In my view, fears surrounding technology giants and AI bubbles are overblown. Strong corporate earnings will renew interest in AI, push the Nasdaq 100 higher, and reassure US dollar bulls.
Weekly Trading Plan for EUR/USD
Thus, a failure to break above the resistance levels of 1.128, 1.13, or 1.134 would provide an opportunity to sell EUR/USD.
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
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