Americans are scared by the Delta, and business activity is slowing down. However, there should not be any downturn in the US GDP growth. Furthermore, the increase in inflation could force the Fed to act aggressively, pressing down the EURUSD. Let us discuss the Forex outlook and make up a trading plan?
Weekly US dollar fundamental forecast
The simplest explanation for why the big players move the financial markets is that they know what everyone else does not know. They do not look where the crowd is looking. While most investors were concerned about a 1.1% drop in retail sales in July and the associated drop in US stock indices, professionals were selling EURUSD estimating the rents. US home rental prices jumped 7.5% in June, showing no sign of downturn amid a hot housing market and construction lags.
Most investors believed the Fed’s mantra that high inflation is temporary. However, further increases in CPI and PCE could seriously change the balance of power in the debt and foreign exchange markets. There is nothing more permanent than temporary. The share of rental prices in core inflation is about 30%, and its fastest surge in May in percentage terms since at least 2005, followed by the further growth in June, says a lot.
Dynamics of rental prices in USA
Source: Bloomberg
Yes, the factors associated with supply, which previously pushed the personal consumption expenditure index up, are likely to be temporary. But they will be replaced by new growth drivers – rental prices and wages. Inflation will turn into a long-term problem, forcing the Fed to aggressively cut QE and raise rates. If so, the US dollar will continue strengthening.
Boston Fed President Eric Rosengren says the current recovery from the recession is different from the previous one. During the previous crisis, the Fed stimulated the suppressed demand with the help of the quantitative easing program. Now the demand is all right. Moreover, by continuing to buy assets, the central bank stimulates it even more, contributing to the rise in prices. The QE should be scaled back as soon as possible and completed by the middle of 2022.
In my opinion, Rosengren is right. When supply shortage and labor deficits create problems, quantitative easing is an unaffordable luxury. As for the decline in retail sales in July, this is nothing more than a pullback after the previous surge. Yes, retail sales could go down even lower in August as the number of COVID-19 infections is rising, and Americans are scared. But there are no signals of the economic downturn. According to Morgan Stanley, due to the slowdown in consumer spending, the growth rate of US GDP in the third quarter will slightly decline, from 6.9% to 6.5%.
The strength of the US economy is evident from the fastest manufacturing production expansion in July over the past four months.
Dynamics of US manufacturing production
Source: Bloomberg
Weekly EURUSD trading plan
There is stable high inflation, aggressive Fed, and growing volatility in the US stock market. What could be better for a greenback? The return of EURUSD to the April lows is just the beginning. The pair should continue falling after the strong US jobs report and the FOMC meeting. Until then, investors are focused on the minutes of the Fed’s July meeting. A hawkish tone of the Fed’s members will send the euro-dollar down towards the second of the three previously indicated targets at 1.166.
Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
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