FOREX Fundamental analysis for EUR/USD on July 3, 2024
At a forum in Portuguese Sintra, Jerome Powell did not surprise the markets by saying that the strong US economy gives the Fed time to think. However, the rhetoric of the head of the Fed was perceived by investors as "dovish". This led to a decrease in Treasury bond yields, which rose markedly after the Joe Biden and Donald Trump debates, which allowed EURUSD buyers to go on the offensive. Isn't it time for investors to reconsider forex trading strategies after the words of the chairman of the Federal Reserve?
It was probably his reasoning that recent statistics indicate the return of the US economy to a disinflationary path. Powell stressed that the Fed wants to make sure of this before starting to adjust rates. Perhaps the frequent mention of the word "progress" in the fight against inflation impressed investors. But, most likely, the essence lies deeper.
Jerome Powell also took the liberty of criticizing the Joe Biden administration for taking excessive risks associated with a huge budget deficit in full employment. He stated that it is impossible to manage such deficit levels for a long time in good economic times, calling on the president to eliminate the financial imbalance. It is clear that his words are directed not only at the Democrats.
But if Joe Biden plans to extend the tax relief program, which has been in effect since 2017 only for those whose income does not exceed $400 thousand per year, then everyone is equal for Donald Trump. His victory in the presidential election will further expand the budget deficit, which, according to forecasts by the Congressional Budget Office, will reach $1.9 trillion in 2024, which is 7% of GDP.
Trump's policy of raising tariffs on imports will help to accelerate inflation, forcing the Fed to keep rates at 5.5% for a long time, which significantly increases the risks of recession. However, this also contributes to the growth of the yield of treasuries and supports the US dollar.
Investors, and the Fed itself, are afraid of Trump's return to the White House. Unlike Biden, Trump has a habit of interfering in the affairs of the Central Bank. There are rumors that the Fed may cut rates in September not only because of the cooling of the economy, but also to support the current government. Powell, speaking about the budget deficit, added arguments in favor of an early start of monetary expansion.
The euro supports the reluctance of core inflation and service prices to decline from their May levels of 2.9% and 4.1%. In addition, Christine Lagarde has unequivocally stated that the ECB's actions are incomplete.
I think investors are overestimating the situation. The Fed will remain neutral, and the federal funds rate cut in September will occur against the backdrop of a cooling US economy. Employment data for June will certainly confirm this, providing an opportunity to strengthen long positions on EURUSD from the area of 1,071-1,072.
EUR/USD Technical analysis
Yesterday, EUR/USD reached the sellers' first target, declining from the resistance area (A) 1.0758 - 1.0750. It was the 1.0712 level. Then the pair tested the resistance area (A) again. Today, buyers are likely to try to break through it and continue strengthening towards the resistance area (B) 1.0804 - 1.0792. After the resistance test (B), we suggest considering new sales of the instrument with the first target at 1.0735.
To change the trend and make purchases, the bulls need to fix the quote above the 1.0804 level. In this case, it will be possible to consider long positions with a target in the range of 1.0943 - 1.0918.