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EUR/USD: the dollar remains in favor once again

EUR/USD, currency, EUR/USD: the dollar remains in favor once again

FOREX Fundamental Analysis for EUR/USD on August 14, 2023

Two sides of the same problem, as well as the main topics of the last years - inflation and recession. The Fed, and other central banks, should precisely find the line separating the effective fight against rising prices and increasing pressure on the economy. Moreover, with financial conditions tightening, the less recessionary risks there are, the longer rates will remain at high levels. This is a pretty strong argument in favor of EUR/USD sellers.

Actually, there is some bad news for dollar buyers, but one good news outweighs all the negatives. If the yield curve showed an inversion between 10- and two-year securities for two months or more, the United States economy went into recession. Except only in pandemic 2020. But there the process had a history of its own.

That is, the risks of an economic downturn will not be outweighed even by strong labor market reporting and unemployment at a fifty-year low. When GDP starts to decline, unemployment will go up.

At the same time, most experts expect a mild recession, which will force investors to get rid of long-term bonds faster and hold on to short-term bonds. This will be the main trump card for the greenback, as in such a scenario, the Fed will keep high rates as long as possible.

Goldman Sachs has already moved its forecast for the first cut in borrowing costs from March to June 2024.

It probably doesn't make sense for the Fed to raise the rate to the previously agreed upon 5.75%. But keeping the rate on a plateau for a long time will not be the worst factor to support the dollar.

At the same time, one should not forget about the risks of a sudden acceleration of inflation. Moreover, the growth of American producers' prices caused the increase in the yield of treasuries, the fall of stock indices, and through the correlation of currencies put pressure on risky assets. All this is to the benefit of the dollar, which is likely to continue strengthening. We continue to hold short positions formed on the breakout of 1.0965, with an eye on 1.081 and 1.085.

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