FOREX Fundamental analysis for EUR/USD on June 14, 2024
The Federal Reserve System (Fed) refuses to celebrate the victory over inflation. The risks of political instability in France and the deterioration of the country's financial system also negatively affect the EURUSD rate. Despite the rally in stock indexes, lower Treasury yields and slowing inflation in the United States, the regional currency remains under pressure. This is reminiscent of the old principle of the market – not to go against the Fed.
The Fed's position is clear. In the 70s of the last century, the premature celebration of the victory over inflation led to a double recession, and no one wants to repeat this mistake. It is no coincidence that Jerome Powell talks everywhere about the conservatism of the Federal Reserve.
At the same time, the recent FOMC forecasts already look outdated against the background of an almost unchanged base CPI and a reduction in PPI in May. Nomura estimates that the personal consumption expenditure index (PCE) will fall to 0.113% on a monthly basis, which implies a drop in PCE below the target level of 2% per annum. Three- and six-month consumer price metrics confirm the development of disinflation.
Potential implications for the U.S. economy
Keeping the federal funds rate at 5.5% may have a negative impact on both the economy and US stock indices, and through currency correlation on risky assets. For stock markets, bad news from macroeconomic indicators becomes good, but this trend cannot continue indefinitely. The correction of the S&P 500 can cause an increase in demand for the dollar as a protective tool
Political instability in Europe
Political instability in Europe is exacerbating the EURUSD situation. France is not Greece, its finances are in better condition than those of the troubled Eurozone countries, but the situation is getting worse, as evidenced by the downgrade of the S&P Global credit rating. The reluctance of the French to tighten their belts and the possible rise to power of eurosceptics may worsen the situation.
Forecasts and trading strategy
Rising government spending, budget deficits and public debt in France could lead to conflict with the European Union, French bond sales and rising yields, which would hit Europe's largest banking system. Paris should take into account the lessons of London, where in 2022 the intention of the Liz Truss government to reduce taxes without adequate financing led to the collapse of bonds and the pound. A similar scenario may develop for EURUSD, despite the positive signals from the United States.
If the market is not moving in the expected direction, it is likely to head in the opposite direction – a well-known postulate of forex currency trading. The rise of the EURUSD against the background of a slowdown in the American CPI resembles a "dead cat jump". We keep short positions open in the area of 1.0835-1.085 and increase them on upward pullbacks. The targets remain at 1.06 and 1.05 levels.