Quarterly US dollar fundamental forecast
In the second reading, Germany's GDP for the second quarter was reduced to -0.3%, which indicates a technical recession. This pushed EURUSD to a two-month low and allowed the price to hit the first of two short targets at 1.0715 and 1.0665. If the situation in the other leading economies of the eurozone does not change, the currency union is likely to face stagnation. How, then, will the euro compete with the US dollar?
Dynamics of the economies of the USA, Germany and the eurozone
In fact, the largest decline in German industrial production in 12 months and a sharp drop in retail sales in March predicted such a negative result. According to Commerzbank, the German economy will contract by 0.3% in 2023. This forecast contrasts the German government's 0.2% and 0.1% IMF growth expectations.
Unpleasant surprises from the German economy could make ECB officials cautious. As a result, the deposit rate may not reach the 3.75% expected by the market and Bloomberg experts. This will be another blow to EURUSD, especially since derivatives have already considered a 25 bps federal funds rate hike in July.
Dynamics of market expectations for the Fed rate
If the divergence in monetary policy is not as big as expected, and the eurozone economy does not meet expectations, USD strengthening against the euro looks logical. However, there is a fly in the ointment in the barrel of honey for EURUSD bears. The debt ceiling.
Despite the fact that the deal has not yet been concluded, the chances are high. Republicans are pushing for cutting discretionary spending in 2024 to 2022 levels and maintaining its 1% annual increase for a decade. This means a $3.3 trillion decrease in total budget spending by 2033 compared to the current Congressional Budget Office forecast. Democrats are ready to reduce it by only $1 trillion.
The truth lies somewhere in between. However, in any case, this will lead to a slowdown in the US economy. According to Bloomberg estimates, limiting government spending for 3-5 years could decrease employment by 340 thousand by the end of 2024. This is painful but still better than a default. On June 15, the Treasury needs to repay $2 billion in treasuries. If this does not happen, Moody's will be forced to downgrade its credit rating from AAA to AA1.
Quarterly EURUSD trading plan
Thus, the weakness of the European GDP hints that the EURUSD level just below 1.11 serves as the high, which is unlikely to be overcome over the next few months. Therefore, short trades in 1.104-1.1055 were opened very reasonably. However, the gradual cooling of the US economy is a strong argument in favor of the fact that there will be no parity. Thus, expect mid-term euro consolidation in the $1.06-1.095. Be ready to sell the pair on the rise and buy on the decline.
In the second reading, Germany's GDP for the second quarter was reduced to -0.3%, which indicates a technical recession. This pushed EURUSD to a two-month low and allowed the price to hit the first of two short targets at 1.0715 and 1.0665. If the situation in the other leading economies of the eurozone does not change, the currency union is likely to face stagnation. How, then, will the euro compete with the US dollar?
Dynamics of the economies of the USA, Germany and the eurozone
In fact, the largest decline in German industrial production in 12 months and a sharp drop in retail sales in March predicted such a negative result. According to Commerzbank, the German economy will contract by 0.3% in 2023. This forecast contrasts the German government's 0.2% and 0.1% IMF growth expectations.
Unpleasant surprises from the German economy could make ECB officials cautious. As a result, the deposit rate may not reach the 3.75% expected by the market and Bloomberg experts. This will be another blow to EURUSD, especially since derivatives have already considered a 25 bps federal funds rate hike in July.
Dynamics of market expectations for the Fed rate
If the divergence in monetary policy is not as big as expected, and the eurozone economy does not meet expectations, USD strengthening against the euro looks logical. However, there is a fly in the ointment in the barrel of honey for EURUSD bears. The debt ceiling.
Despite the fact that the deal has not yet been concluded, the chances are high. Republicans are pushing for cutting discretionary spending in 2024 to 2022 levels and maintaining its 1% annual increase for a decade. This means a $3.3 trillion decrease in total budget spending by 2033 compared to the current Congressional Budget Office forecast. Democrats are ready to reduce it by only $1 trillion.
The truth lies somewhere in between. However, in any case, this will lead to a slowdown in the US economy. According to Bloomberg estimates, limiting government spending for 3-5 years could decrease employment by 340 thousand by the end of 2024. This is painful but still better than a default. On June 15, the Treasury needs to repay $2 billion in treasuries. If this does not happen, Moody's will be forced to downgrade its credit rating from AAA to AA1.
Quarterly EURUSD trading plan
Thus, the weakness of the European GDP hints that the EURUSD level just below 1.11 serves as the high, which is unlikely to be overcome over the next few months. Therefore, short trades in 1.104-1.1055 were opened very reasonably. However, the gradual cooling of the US economy is a strong argument in favor of the fact that there will be no parity. Thus, expect mid-term euro consolidation in the $1.06-1.095. Be ready to sell the pair on the rise and buy on the decline.