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.