Hedge funds and asset managers took advantage of the pullback in the EURUSD pair to open new long positions, as the divergence in monetary policy and economic growth will become apparent sooner or later. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Major Takeaways
- Speculators continue to sell the US dollar.
- Non-residents are increasing their purchases of US stocks.
- The euro’s decline is largely attributed to hedge unwinding.
- Long positions on the EURUSD pair formed at 1.1645 can be kept open.
Weekly US Dollar Fundamental Forecast
When sellers dominate the market, it becomes a prime time to purchase assets at a lower price. Hedge funds and asset managers leveraged the strengthening of the US dollar following the Fed’s rate cut to increase their net shorts on the greenback to their highest levels since July. The divergence in monetary policy and economic growth will eventually have a tangible impact, presenting a compelling opportunity to purchase the EURUSD pair at a favorable price.
Speculative Positions on US Dollar
Source: Bloomberg.
The pullback in the major currency pair continued amid a correction in US stock indices, starting as a sale of the news that the Fed’s monetary expansion cycle will resume. Following Liberation Day on April 1, concerns arose that non-residents would begin divesting from US products and securities. However, they were unable to abandon the world’s largest and most liquid market. Moreover, the US is at the forefront of this technological advancement, propelled by advancements in AI.
Foreign investors purchased $290.7 billion worth of US stocks in the three months leading up to June. As a result, their holdings grew to $18 trillion, representing approximately 30% of the $60 trillion equity market. At one point, the figure exceeded 32%, breaking the record set in 1968.
US Equities Owned by Non-Residents
Source: Bloomberg.
However, while US shares continue to be highly sought after, the US dollar is facing strong headwinds. Aversion to the US dollar, driven by tariffs imposed by the Trump administration, has been a prevalent sentiment throughout most of the year. One of the factors contributing to the decline in the USD index was the active hedging of currency risks by non-residents, who simultaneously sold the greenback and purchased the S&P 500 index.
As expected, the market pullback led to a decrease in the broad stock index, resulting in a decline in the EURUSD rate due to the closing of hedge positions. However, as soon as investors purchased US stocks, the major currency pair began to surge. The period between September and October will be pivotal in this regard.
European inflation is expected to accelerate by 2.2%, and the US employment is projected to increase by 50,000. These figures are sufficient for the ECB to conclude its cycle of monetary expansion, while the Fed persists in its own. As a result, the spread between central bank rates and debt markets will narrow, which is a powerful springboard for the EURUSD to move higher.
The market has a tendency to buy on rumors. Therefore, a rally in the main currency pair appears to be a probable scenario. However, one should not rule out the possibility of consolidation. The US labor market figures are not yet known, and the S&P 500’s inability to set new records will likely dampen the euro’s bullish momentum.
Weekly EURUSD Trading Plan
As anticipated, the breakout of the support level of 1.1645 proved to be a false one. Thus, long positions were opened on the EURUSD pair. Those who have followed this recommendation are advised to maintain their current positions. If you have missed this opportunity, you can adhere to the previous strategy of buying the euro on pullbacks.
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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