Dollar opens the doors. Forecast as of 17.06.2024 | LiteFinance
Increasing political risks in Europe are shifting money into US stocks and bonds. Consequently, quotes are falling despite unfavorable conditions for the EURUSD bears. Let’s discuss this and make a trading plan.
Weekly fundamental forecast for dollar
Every day is a lesson. Until now, the S&P 500‘s rally, the decline in US Treasury yields, the deterioration of US macro statistics, and the slowdown in American inflation were seen as bad news for the greenback. However, the USD index is rising in June not only against the euro, which was afraid of a potential split between France and the EU, but also against the pound as Labor has insisted on restoring ties with the European Union. A paradox?
The only plausible explanation could be the rising demand for the USD as a safe-haven asset. Although American exceptionalism is no longer a trump card for the greenback amid the economic slowdown, the US is still seen as an area of stability when Europe feels unsettled. Unsurprisingly, the S&P 500 is soaring, and Treasury yields are falling. German yields are declining even faster. The spread between German and US bond yields is increasing, and the EURUSD is sliding.
France/Germany bond yield dynamics
Source: Reuters.
The differential between French and German debt rates soared to its highest since 2017, showing the fastest growth pace since 2011. The market remembers Grexit and Brexit and talks about Frexit. However, Greece never left the eurozone, while Britain’s sad experience has forced Eurosceptics to reject this idea concerning France. However, the National Rally, leading in the polls, and the Alliance of left parties insist on increasing spending and the budget deficit, opposing Brussels’ demands. Finance Minister Bruno Le Maire calls their ideas “complete madness,” warning that such a program will lead to downgrade, mass unemployment, and the country’s exit from the European Union.
Popularity of French parties
Source: Bloomberg.
Meanwhile, a 0.3% MoM decline in US import prices and a 0.4% MoM decline in US export prices in May provided further evidence of slowing inflation and allowed derivatives to raise the odds of a September federal funds rate cut to 68%. The chance of two cuts increased to 71%. Unsurprisingly, Treasury yields dropped, but the US dollar did not want to fly into the abyss.
The greenback takes advantage of its safe-haven status and the flow of capital from Europe to North America. How long can this last? Until the elections in France, the first round of which will take place on 30 June. The growing popularity of left and right parties may defeat Macron’s Renaissance and worsen relations with the EU. Positive stats on the euro area’s business activity will hardly help the EURUSD bulls. When all investor attention is focused on politics, the currency bloc’s economic recovery fades into the background.
Weekly trading plan for EURUSD
The sell-off of French assets may have been too massive, but it would be hard for the euro to recover amid growing political risks. So, build up shorts if the EURUSD returns below support at 1.07 or pulls back from resistance at 1.077 and 1.08.
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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