In 2022, Forex does not let investors get bored. Strong trends, numerous shocks and volatility growing by leaps and bounds attract increased attention to the international currency market. It is not for nothing that the trading volume on it, according to BIS research, has grown to $7.5 trillion per day, which is 14% more than in 2019. Still, Forex lacks the spice that Donald Trump once added with his antics. And now the eccentric Republican has the opportunity to return. Will the spectacle become even more interesting?
Investors are shifting their attention on the US midterm elections. Markets predict with a 70% probability that Republicans will seize control of the Senate and the House of Representatives, while the chances of Democrats to remain in power are estimated at a modest 10%. However, US President Joe Biden will continue to sit in the White House until 2024, and in theory this means that fewer laws will be passed in the next couple of years. For Forex, the Republicans' emphasis on fiscal consolidation is important, which will lead to a reduction in the budget deficit, reduce the volume of bonds issued and increase demand for them from non-residents. The inflow of capital into America will support the US dollar.
Dynamics of the US budget deficit
However, no matter how much politicians would like to influence the exchange rate, the prerogative in this matter clearly belongs to the Federal Reserve. Following the November FOMC meeting, CME derivatives raised expectations for expected rates for 2023-2025. The ceiling has shifted to 5.15%, above the Open Market Committee's September forecast of 4.6% and is bullish for the US dollar.
Dynamics of the expected federal funds rate
As the cost of borrowing rises, so will the yield on US Treasury bonds, which has already reached its highest level since 2007-2008. This worsens the fundamental valuation of US stocks, contributes to the fall of stock indices, worsening global risk appetite and increases demand for the dollar as a safe-haven asset.
The yield on debt obligations will fall only in case of deterioration of macroeconomic statistics in America. However, as long as the US labor market remains strong and inflation wanders at the highest levels in the last 40 years, the Fed will consider its work not done and will continue to raise rates. This circumstance gives grounds to classify any growth of EURUSD as a correction. The downward trend remains in force, especially since due to the relative weakness of the eurozone labor market compared to the US, the European Central bank cannot afford to raise rates as high as the Fed.
Technically, on the EURUSD daily chart, returning above the fair value by 0.978 to the limits of the corrective ascending channel delays the sad end for the bulls, but does not cancel it. The rebound from the resistance at 0.9845 and 0.987, as well as the fall below the support at 0.978 are the basis for short positions. The bearish targets are 0.964 and 0.949.