The principle “buy greenback on rumor, sell on the fact” may lead to EURUSD correction after the release of inflation data. Should we be afraid of this correction? Let us discuss the Forex outlook and make up a trading plan.
Fundamental US dollar forecast for a week
When do the trends reverse? When the crowd is sure they are right! This was the case in January, when the slow unfolding of the vaccination process in the EU forced the EURUSD bulls, who hoped for the level of 1.25, to give up in a panic. This was the case in June, when the Fed suddenly stopped being passive, signaling a possible rate hike as early as 2022. But the market consensus assumed that the central bank would continue to stick to its wait-and-see approach for a very long time. Currently, the opinions of banks on the fate of the main currency pair are divided. Is the downtrend still in effect?
Goldman Sachs believes that the US economy will slow down as the fiscal impulse turns negative, and the slowdown in inflation will allow the Fed to be in standby mode for a long time. Bank of America, by contrast, is confident that as markets assess the reality of the Fed’s monetary policy change, the accompanying normalization in securities and commodity prices will support the greenback. And finally, in the derivatives market, starting from July 9, hedge funds have been steadily reducing the net shorts in the US dollar, which had reached multi-month peaks by that time.
Dynamics of the USD index and dollar speculative positions
Source: Bloomberg.
The forecasts for the USD index are based on inflation. Proponents of its slowing down talk about the gradual disappearance of temporary factors associated with limited supply. Their opponents insist that massive fiscal stimulus, labor market imbalances and rising rental prices will make high inflation a long-term factor and force the Fed to aggressively normalize monetary policy.
The time has come for a reversal of the long-term uptrend in US Treasuries, according to M&G Investments, as huge fiscal stimulus and labor shortages will lead to higher wages, overcoming long-term deflationary trends. These trends are associated with the rise of technology and the impact of globalization on international trade. The Treasury yield rally is exactly what the greenback needs right now to continue its offensive on the world’s major currencies in Forex. This is proved by the events of August 10, when the EURUSD pair reached the previously indicated target of 1.1715, despite the 45th record closing of the S&P 500 in 2021 due to the adoption of the $1 trillion infrastructure project by the Senate.
If inflation is at the core of market ideas and positioning, why shouldn’t the US dollar strengthen on expectations of the July US CPI data release? Yes, Bloomberg experts predict a slowdown in consumer prices from 5.4% to 5.3% YoY and from 0.9% to 0.5% MoM, and core inflation from 4.5% to 4.3% YoY. However, the indicators will continue to be near multi-year highs.
Inflation dynamics in the US
Source: Bloomberg.
Weekly EURUSD trading plan
Of course, there is a risk of working out the principle of “buy greenback on rumor, sell on the fact”, but when major traders use the news to adjust their positions, one should not be afraid of EURUSD growth. The first of the three indicated targets for 1.1715 has been met. Continue to sell the pair on the correction.
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 LiteForex. 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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