FOREX Fundamental analysis for EUR/USD on July 23, 2024
Investors were completely carried away by the "Trump trade", considering it to be pro-inflationary and favorable for bitcoin, gold, shares of small companies and banks. They believe that it is necessary to get rid of treasuries with long circulation periods, as well as shares of technology companies. However, when the Republican won in 2016, traders were also afraid of the collapse of the S&P 500 due to the chaos, but thanks to tax cuts and deregulation, the index grew by 20% over the year and helped risky assets through currency correlation. Perhaps the markets are wrong again?
Joe Biden's exit from the presidential race has changed little. Kamala Harris is 89% likely to take his place, and her chances of winning are about 40%. Investors continue to focus on the "Trump trade", although they are increasingly visited by doubts.
At first glance, the resumption of trade wars may disrupt supply chains and, together with fiscal incentives, accelerate inflation. However, reducing imports can reduce domestic consumption and slow down price growth. No government wants to displease the population by accelerating inflation.
Deutsche Bank, Barclays and Morgan Stanley believe that a Republican victory will strengthen the US dollar relative to other forex currency indices. The response of China and other countries to the new duties will slow down the global economy, which will negatively affect the dollar's competitors. At the same time, the Fed will keep the federal funds rate longer, which will support the USD index. At the same time, Jefferies argues that the White House's political pressure on the Federal Reserve will undermine the attractiveness of the dollar as a reserve currency.
But this is the nature of forex currency trading: no one knows exactly what will happen. One can only assume. Current narratives effectively move quotes of various financial instruments, but if the directions turn out to be wrong, there is a sharp movement in the opposite direction. An example is investors' expectations for a reduction in federal funds rates at the beginning of the year. However, the US dollar turned from an outsider to a leader when these expectations were not met.
The summer is characterized by a struggle between "Trump Trade" and the Fed's monetary policy. To understand what is winning, it is worth looking at the difference in the rates of short- and long-term US bonds.
If earlier US inflation data led to expectations of a Fed rate cut, now politics is in the spotlight. However, the forex trading strategy remains the same – buying EUR/USD on the rebound from the supports at 1.086 and 1.0825-1.0836 or on the breakout of resistance at 1.0905.