Divergence in economic growth and monetary policy, coupled with currency risk hedging by non-US residents, should have made the US dollar a sitting duck. However, EURUSD bears are resisting. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- European PMIs are near 16-month highs.
- The OECD raises its global GDP forecast.
- The Fed’s rate cut in September is the first in the cycle.
- Long positions on the EURUSD pair can be opened if the price breaks through 1.1825.
Weekly US Dollar Fundamental Forecast
If the EURUSD pair does not move as expected, it is more likely to go in the opposite direction. Neither the dovish rhetoric of FOMC members, nor the OECD’s upward revision of its global economic forecasts, nor the divergence in PMIs helped the euro pierce the 1.1825 mark. If it fails to do so in the coming days, the risks of another consolidation will increase.
According to FOMC Governor Michelle Bowman, the September cut in the federal funds rate should be the first in the easing cycle. Jerome Powell said that resuming the cycle of monetary expansion in September was the right decision given the slowdown in the labor market. At the same time, the surge in inflation due to tariffs will likely be temporary.
The dovish rhetoric of Fed officials, coupled with a slowdown in the US PMI to a three-month low, has increased the chances of a sharp cut in the federal funds rate in October to 92%. On paper, this should have supported EURUSD bulls, especially since the European composite purchasing managers’ index has jumped to a 16-month high. The eurozone has proven its resilience to tariffs, and the divergence in the PMIs is a positive sign for the euro.
Euro-Area PMI
Source: Bloomberg.
Another piece of good news for the single currency was the OECD’s upward revision of its global GDP forecast for 2025 from 2.9% to 3.2%. The main reasons cited are the frontloading of US imports ahead of the introduction of tariffs, large-scale US investment in the AI sector, and China’s fiscal stimulus measures.
Global GDP Forecast
Source: Bloomberg.
For the export-oriented eurozone, the acceleration of the global economy is like blessing. The same applies to its currency. The euro is the currency of optimists, so any positive news is a reason for its growth. Moreover, historically, the USD index has fallen when global GDP has gained momentum and the US economy has lost steam.
If the euro maintains its status, the dollar may lose its own. According to the Bank of Canada, pressure from the US administration on the Fed is eroding investor confidence in the US dollar as a safe-haven asset. Non-US residents are buying US securities and simultaneously hedging against the risk of a fall in the USD index. This led to a 10% decline in the first half of the year.
It is difficult to expect any changes at this point. The different monetary policy pace of the Fed and the ECB, the divergence in economic growth between the US and the eurozone, and active hedging of currency risks by foreign investors when investing in US stocks and bonds indicate that the upward trend in the EURUSD pair remains intact.
Weekly EURUSD Trading Plan
If the euro breaks above 1.1825, long trades can be increased. However, unforeseen events may occur in the short term. If the EURUSD pair fails to break through this threshold, it may start another consolidation.
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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