[Cancelled without entry] Long Term Trade Plan: EUR/USD
Monday, 29th July, Week 30: This long-term trade plan analyses the recent performance of EUR/USD and explores potential trading opportunities over the next five weeks. It provides a contextual narrative of price action, identifies key market themes and economic events, and outlines potential upside and downside risks. The report concludes with actionable insights and a list of sources.
Trading involves a possibility of losing money therefore all decisions in market speculation are undertaken at your own financial risk.
Euro's Balancing Act: Five Months of EUR/USD's Rollercoaster Ride
The EUR/USD has experienced significant volatility over the past five months, driven by shifting interest rate differentials between the US Federal Reserve (Fed) and the European Central Bank (ECB), as well as fluctuating risk sentiment stemming from global economic uncertainty and geopolitical tensions. The pair started February near the 1.0850 mark, but a hawkish repricing of Fed expectations, fuelled by resilient US economic data, propelled the dollar higher, pushing EUR/USD to a low of 1.0792 on 31st March. This marked the most significant move within the five-month period, as markets began to price in a higher terminal rate for the Fed and a more prolonged period of restrictive monetary policy.
However, the euro found its footing in late April, staging a comeback as US economic data began to show signs of cooling and the ECB maintained its hawkish rhetoric. EUR/USD climbed back above 1.0800 in early May, reaching a high of 1.0896 on 17th May. This rebound was driven by a combination of factors, including a dovish repricing of Fed expectations, a more resilient-than-expected Euro Area economy, and safe-haven flows into the euro amid concerns about a potential US recession.
Over the past five weeks, EUR/USD has been trading within a relatively tight range, hovering around the 1.0850 mark. This suggests that the market is in a state of consolidation, with traders awaiting further clarity on the outlook for US monetary policy and the trajectory of the Euro Area economy. This consolidation phase contrasts with the broader trend of the previous five months, which saw more pronounced swings in the pair's value.
Summary: The EUR/USD has been driven by shifting interest rate differentials and risk sentiment over the past five months, with a hawkish Fed initially pushing the pair lower before a dovish repricing and a resilient Euro Area economy supported a rebound. However, recent weeks have seen the pair consolidate, reflecting market uncertainty about the future direction of both the US and Euro Area economies.
Euro at a Crossroads: Five Weeks of Potential Volatility for EUR/USD
Looking ahead, the next five weeks could be a pivotal period for EUR/USD, with several key events and market themes likely to influence the pair's direction. Upside potential for the euro could stem from a weaker-than-expected US economy, particularly if the July FOMC meeting signals a more cautious approach to rate cuts than currently anticipated. A dovish Fed could weigh on the dollar, supporting EUR/USD. Additionally, any signs of a more robust recovery in the Euro Area economy, particularly if inflation shows signs of easing, could boost the euro.
Conversely, downside risks for the euro could arise from a more resilient-than-expected US economy, particularly if inflation proves stickier than anticipated or if the Fed maintains a hawkish stance. A strong US economy could support the dollar, pushing EUR/USD lower. Additionally, concerns about the health of the Euro Area economy, particularly in light of the ongoing energy crisis and geopolitical uncertainty, could weigh on the euro. Forex traders should pay close attention to the potential impact of the upcoming US Presidential Election on both the US dollar and the euro. A hawkish Bank of Japan, particularly if it signals a willingness to further adjust its yield curve control policy at its meeting on Wednesday 30th July, could support the yen, putting downward pressure on EUR/JPY and indirectly impacting EUR/USD.
Traders should also be aware of the potential for increased volatility around key economic data releases, such as the flash estimates for July inflation in Germany and the Euro Area (Week 31), the release of the minutes from the July ECB Governing Council meeting (Week 32), and the preliminary estimate for Euro Area Q2 GDP growth (Week 31).
Upside: A weaker-than-expected US economy, particularly if the July FOMC meeting signals a more cautious approach to rate cuts, could weigh on the dollar, supporting EUR/USD.
Downside: A more resilient-than-expected US economy, particularly if inflation proves stickier than anticipated or if the Fed maintains a hawkish stance, could support the dollar, pushing EUR/USD lower.
Action Points: Navigating the Forex Minefield
The next two weeks will be crucial for forex traders, with several key events and data releases likely to shape market sentiment and influence currency valuations.
Key Events to Monitor:
Week 31 (30th July - 3rd August):
Tuesday 30th July: Euro Area GDP Growth Rate QoQ Flash Q2, US CB Consumer Confidence, BoJ Interest Rate Decision
Wednesday 31st July: Germany Inflation Rate YoY Flash JUL, Euro Area Inflation Rate YoY Flash JUL, US ADP Employment Change, US EIA Crude Oil Stocks Change, FOMC Interest Rate Decision
Thursday 1st August: Euro Area Unemployment Rate JUN, US ISM Manufacturing PMI, US Initial Jobless Claims
Friday 2nd August: US Non-Farm Payrolls, US Unemployment Rate, US Average Hourly Earnings MoM/YoY, BoE Interest Rate Decision
Week 32 (6th August - 10th August):
Tuesday 6th August: US Balance of Trade
Wednesday 7th August: US EIA Crude Oil Stocks Change
Thursday 8th August: US Initial Jobless Claims
Friday 9th August: US PPI MoM, US Michigan Consumer Sentiment Prel
TRADE THESIS
Short Position Justification:
A short position on EUR/USD is justified based on the expectation of continued US dollar strength and euro weakness. The US economy, while showing signs of cooling, remains relatively robust, with strong consumer spending and business investment. The Fed, while acknowledging easing inflation, has maintained a hawkish stance, signalling that rate cuts are not imminent. This suggests that the US dollar will remain supported in the near term.
Conversely, the Euro Area economy faces significant headwinds, including the ongoing energy crisis, geopolitical uncertainty stemming from the Russia-Ukraine war, and persistent inflation. The ECB, while maintaining a hawkish rhetoric, has acknowledged downside risks to the economic outlook. This suggests that the euro could remain under pressure in the coming weeks. Additionally, escalating geopolitical tensions between Russia and the West, as highlighted in the provided information, could further weigh on the euro.
Conclusion
The EUR/USD is poised for potential volatility in the coming weeks, with the outlook hinging on the interplay of US and Euro Area economic data, central bank policy decisions, and geopolitical developments. Traders should closely monitor key economic events and data releases, as outlined in the action points, to identify potential trading opportunities. A short position is currently favoured based on the expectation of continued US dollar strength and euro weakness. However, a long position could become more attractive if the market narrative shifts towards a more pessimistic outlook for the US economy and a more optimistic view of the Euro Area.
Sources
Trading Economics
Newsquawk
Stratfor
European Central Bank
Federal Reserve
U.S. Bureau of Economic Analysis
U.S. Bureau of Labor Statistics
U.S. Census Bureau
National Association of Home Builders
Standard & Poor's
National Association of Realtors
Federal Reserve Bank of New York
Federal Reserve Bank of Philadelphia
Federal Reserve Bank of Dallas
Federal Reserve Bank of Chicago
University of Michigan
Technometrica Market Intelligence/RealClearMarkets