EUR/USD: US economy strengthens the dollar

EUR/USD, currency, EUR/USD: US economy strengthens the dollar

FOREX Fundamental analysis on September 7, 2022

Yesterday's release of the ISM index of business activity in the U.S. reiterated the hypothesis that if the economic slowdown in the United States does begin, in contrast to the Eurozone, it is unlikely to be prolonged and deep. Investors are choosing the New World. That's been evidenced by four out of six weeks of capital inflows into U.S. funds. But that's not the only factor putting pressure on the EUR/USD.

Not only is a strong economy supporting the dollar, but the dollar is supporting the economy. Rising inflation in the world is forcing Central Banks to tighten monetary policy which, at best, slows economic growth. Because most commodities are traded in dollars, the strengthening greenback is worsening financial conditions for consumers. According to an analysis by Capital Economics, Germany loses 3.3% of GDP on this, Italy loses 5.3%. Even in the oil crisis of the 1970s, the losses were not as severe.

In those days, rising costs eventually turned into a collapse in prices. The same thing will happen to the price of gas, only we don't know when. Oddly enough, the exchange value of energy will depend a lot on the weather. AccuWeather predicts that the winter in Europe will be 1 - 2 degrees above the average temperature, but warm winters tend to have abnormally cold periods. At the same time, Goldman Sachs believes that the markets do not fully appreciate the consequences of the energy crisis and thus underestimate the "bearish" potential of EUR/USD.

Even in the estimation of the dollar positioning there are contradictions. According to Bloomberg, the greenback is at a record high while the real effective dollar exchange rate is 11% below its 1985 peak.

At the time, the Fed was pursuing an aggressive campaign to rein in inflation. Jerome Powell also intends to follow the path of his predecessors. The EUR/USD downtrend is far from over, so our forex trading strategies use any recovery in the asset for new selling towards 0.95.

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The "ceiling" in the United States has been raised. But the problems remain
US Dollar Index, index, The \ Everyone was very afraid that the US would default, but it seems to have been cleared: Congress approved the increase of the national debt limit. But that doesn't mean that all is well ahead. As soon as the US starts printing new Treasuries, their stock market might crash. After all, the big problems of the US economy are not going anywhere.The budget deficit will remain largeThere are no options: The Treasury needs to borrow urgently to fill the hole. For several months, the government has been literally scraping at the coffers to avoid a default. Now, over the next three months, the Finance Ministry will have to borrow $730 bln, according to Morgan Stanley. The deficit is not going to disappear: the Democrats did not cut so much spending, and now the elections are approaching: no time to save.As a result, not only will the national debt grow, but (even worse) the cost of its service. In a few more years, the US budget will spend more on bond coupons than on military spending.All the factors are in place to keep those interest rates even higher:High inflation is keeping the key rate down.The default issue has not disappeared, but is "hanging in the air," and the profitability will have to tempt investors to take the risk.Investors will flee into treasuriesWhy risky assets when there is a safe haven of treasuries? As long as rates are high, US government bonds have attractive yields. So a new issue could be bought back quickly - and liquidity would plummet from the market.Investors are really worried: bets on the decline of the major ETFs in the US have reached a record high, notes Goldman Sachs.
Jun 06, 2023 Read
EUR/USD: bond buyback could shake the dollar's position
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Jun 06, 2023 Read
Forex AUD/USD: tomorrow the RBA will announce its interest rate decision
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Jun 05, 2023 Read
Forex analysis and forecast for GBP/USD for today, June 5, 2023
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Jun 05, 2023 Read
Forex analysis for EUR/USD: US Employment Breaks Records
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Jun 05, 2023 Read
EUR/USD: Non-farm Payrolls won't help the dollar
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Jun 02, 2023 Read
Forex pair EUR/USD: FOMC is in no hurry to raise the rate
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Jun 01, 2023 Read
Forex analysis and forecast for USD/JPY for today, June 1, 2023
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Jun 01, 2023 Read
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