Investors are buying cheap big tech stocks and hedging their risks by selling dollars. As a result, even the reduced likelihood that the Fed will ease its monetary policy is not helping EUR/USD bears. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The EUR/USD pair is sensitive to the S&P 500 index.
- The growth in hedging volumes is weighing on the US dollar.
- The chances of a Fed rate cut in June are falling.
- Short positions can be considered if the EUR/USD pair returns below 1.1805.
Weekly Euro Fundamental Forecast
Don’t put all your eggs in one basket. After Liberation Day in America, investors eagerly rotated their portfolios toward cheap European and Japanese stocks, making them quickly scarce. In contrast, US tech companies became cheaper. At the same time, NVIDIA’s strong corporate reporting prompted investors to redirect their capital to the United States. At the same time, hedging volumes are growing through dollar sales. Is it any wonder that the EUR/USD pair rallied in response to the S&P 500’s recovery?
Today, cheap stocks outside the US are hard to find! Their share, in terms of price-to-forward earnings ratio, has fallen over the past year in Europe from 15% to 3%, and in Japan from 8% to 2%. In contrast, the share of European stocks with a P/E ratio above 33 has jumped to 13%.
P/E Ratio for European Stocks
Source: Bloomberg.
According to Bloomberg experts, the EuroStoxx 600 index has reached its ceiling. It is unlikely to grow significantly from current levels. Many positive factors have already been priced in, and corporate earnings expectations are obviously inflated. All these factors are discouraging investors from buying European stocks.
The US and big tech stocks, which have fallen significantly, are regaining their status as lucrative investments. At the same time, hedging currency risks seems essential. Investors are used to following the “buy and hold” principle. For them, the potential short-term strengthening of the greenback means nothing. If the futures market expects the federal funds rate to fall in 2027 and believes that pressure from the US government will undermine the Fed’s independence, selling the US dollar is necessary.
Meanwhile, Atlanta Fed President Raphael Bostic voiced concern about pressure on the central bank, stressing that legal and verbal battles surrounding the Fed were casting doubt on its independence. Given Donald Trump’s refusal to back down even after the Supreme Court ruled tariffs illegal, it’s clear that, sooner or later, he will get his way on interest rates.
Expected Scale of Fed Monetary Expansion in June
Source: Bloomberg.
Investors have the future in mind. This is the only way to explain the EUR/USD pair’s rally amid falling expectations that the Fed will ease monetary policy in June to 46%. A week ago, it was 62%.
Of course, one could note that the return of tariffs risks being delayed for a long time, meaning the US economy will not receive the necessary fiscal stimulus in the near future. However, this factor clearly loses out to currency risk hedging.
Weekly EURUSD Trading Plan
The bullish outlook for the EUR/USD pair remains unchanged. However, in the short term, the US dollar is likely to outperform the euro due to the Fed’s prolonged pause. Therefore, a drop below 1.1805 will offer a selling opportunity.
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.