FOREX Fundamental analysis for September 27, 2022
It is known that currency trading on the forex market is similar to swinging. Assets climb higher and higher, only to rapidly descend afterwards.
The trade-weighted dollar rate, calculated by the Fed over the last year rose by 22% and reached a new record high.
But as the historical calculations show, the index was down 7.7% and 6.7% for two months in 2009 and 2015, after rising over 20%. Are we headed down the mountain again anytime soon?
Net longs on the dollar as of September 20 are $10.23 billion, almost half the value of July's high of $20 billion. Nevertheless, forex hedge funds have been holding bullish trades for 62 weeks. The BofA calls the greenback purchase "the most crowded trade," although analysts at investment firm Bailard predict a 10-15% rebound in the dollar against the euro and yen in the very near future.
Other experts are less determined. Indeed, most of the "bearish" factors have already been taken into account by EUR/USD quotations, which gives grounds for an upward correction, but the fundamental background is still negative towards EUR and favors the dollar. Though ECB decided to keep up with the Fed and raised the rate by 75 basis points, the pace of monetary restriction is incomparable. In addition, the Fed is reducing its balance sheet by $95 billion a month, which the European regulator cannot afford. Christine Lagarde thinks QT can be launched only after rates reach a neutral level.
Also pressure on EUR/USD is supported by the difference in economic growth rates. The war in Ukraine, which according to the World Bank will cost the global economy $2.8 trillion, still hurts the Eurozone more than the United States. If the Russian invasion continues, gas prices could rise another 30-50%, sending the Eurozone economy into recession.
In addition to the above factors, EUR/USD sellers are supported by investors' rejection of risky assets.
Sellers' fixation of short positions might provoke a pullback with a possible recovery to the parity level. Nevertheless, the downtrend remains in force. The pair might continue falling first to 0.95 and then to 0.92, so we continue to sell on the rise.
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