Amid high debt levels, the US dollar is currently considered a risky currency. Carry traders have increasingly relied on it as a key tool in their strategies. Consequently, when the S&P 500 rallies, the EUR/USD pair tends to decline. Let’s explore this dynamic and outline a trading plan.
The article covers:
- Key Takeaways
- Weekly US Dollar Fundamental Outlook
- Weekly EUR/USD Trading Plan
Key Takeaways
- A weak labor market has weighed on the US dollar.
- Rising stock indices have supported the greenback.
- Internal divisions within the Fed are intensifying.
- Long positions on EUR/USD can be considered above 1.154.
Weekly US Dollar Fundamental Outlook
The US economy is navigating a period of uncertainty. However, even when the dollar appears vulnerable, it often finds unexpected support. The recent surge in stock indices—following disappointing ADP private sector employment data—has curbed EUR/USD bullish sentiment.
Amid the ongoing government shutdown and reduced market volatility, the US dollar has become a high-risk asset, making it especially attractive to carry traders. Deutsche Bank estimates that 80% of non-resident US stock transactions are hedged, a historically elevated level. As a result, the S&P 500 rally draws capital into the US without requiring the sale of dollars for currency hedging. This dynamic typically pushes the EUR/USD exchange rate lower when stock indices rise.
US Labor Market Statistics
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Source: Bloomberg
The euro strengthened above 1.16 against the dollar, supported by weaker-than-expected US non-farm payrolls data. The four-week average as of October 25 dropped to 11,250, indicating that the labor market is struggling to generate new jobs, according to ADP. Goldman Sachs forecasts a decline of 50,000 jobs in October, while other sources also report disappointing figures. Additionally, a University of Michigan survey shows that 71% of Americans expect unemployment to rise—the lowest level recorded since 2013.
Considering the negative impact of the government shutdown on the US economy, the dollar appears particularly vulnerable. The Congressional Budget Office estimates that the shutdown will reduce fourth-quarter GDP by 1.5 percentage points, while Oxford Economics projects a 1-percentage-point decline.
Despite these challenges, the US dollar has remained relatively stable. Following the release of recent ADP data, markets have only modestly increased expectations for a Fed rate cut, with probabilities fluctuating between 62% and 67%. Investors largely anticipate that the Federal Reserve will continue to prioritize official economic statistics over alternative data sources.
Market Expectations for the Fed’s Rate Path
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Source: Bloomberg
The divide within the FOMC is growing more pronounced, prompting Jerome Powell to question the market’s confidence in a potential December rate cut. Fed doves highlight the weakness in the labor market, though there is limited concrete data to support this view. In contrast, hawks point to robust consumer spending and persistently high inflation, advocating for a pause in rate adjustments.
Under these conditions, the most balanced approach could be a rate cut in December, paired with guidance indicating a potential pause in January. However, new economic data could alter this outlook.
Weekly EUR/USD Trading Plan
The ongoing stock market rally is unlikely to support the US dollar indefinitely. The underlying weakness of the US economy is expected to become increasingly evident. As a result, the primary strategy is to consider buying the EUR/USD pair above the 1.154 level.
This forecast is informed by an analysis of fundamental factors, including statements from financial institutions and regulators, geopolitical and economic developments, and official statistical data, alongside historical market trends.
EUR/USD Current Rate in the Forex Market:
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Not profitable? Don’t worry! Join our copy trading system where we provide lower risk returns. Benefits of Joining Us:
-Lesser Risk as lot size is minimal
-Higher returns (approx. 5% to 10% monthly)
-Easy Deposit and Withdrawal with USDT using crypto wallets
-Lesser Drawdown
-Instant Support
-Invest Now and get guaranteed returns with us. DM us for more info❤️
-Start Now
*Copy Trading is free but we charge some percentage of profit as fees.*
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