The time is coming when the strongest trend is coming to an end. But this does not apply to the American dollar. In 2021, it strengthened due to expectations of monetary tightening by the Federal Reserve, and in 2022, due to its implementation. In 2023, investors expected the trend in the USD index to be broken. And at first, everything was going according to plan. However, in the summer, there was a 180-degree turnaround, which came as a real surprise to hedge funds. They remain short sellers of the American currency and are losing money.
Dynamics of the U.S. dollar and hedge fund positions
The September survey of Reuters experts suggests that in the short term, "bears" on EUR/USD will maintain their strength due to a strong economy and high U.S. Treasury bond yields. However, over the next three months, the euro will rise to $1.09. In 6 months, it will be worth $1.10, and in 12 months, $1.12. This forecast is based on the idea of a dovish pivot and the central bank's move towards reducing federal funds rates. Derivatives indicate that it will drop by 100 basis points in 2024.
The same opinion was held about the U.S. dollar at the beginning of the year, but its opponents were proven wrong. At that time, investors were worried about a recession. It was supposed to force the Federal Reserve to loosen its monetary policy. In the early autumn, markets began to fear not an economic downturn but its overheating. If the United States maintains its strength, inflation could accelerate, prompting the Federal Reserve to return to monetary tightening and further strengthen the American dollar.
If we also consider that the American economy is the cleanest shirt in the basket of dirty laundry, the decline in EUR/USD seems logical. Indeed, following new manufacturing orders in Germany, German industrial production disappointed. In July, it contracted by 0.8%. The leading economy in the eurozone has still not emerged from the slump. Is it surprising that the GDP of the currency bloc grew by only 0.1% in the second quarter? Less than the 0.3% in the initial estimate.
Dynamics of German industrial production
Thus, if in 2021-2022, the focus in the Forex market was on monetary policy and fear of high inflation, in 2023, they gave way to economic growth divergence. Judging by the strong labor market positions and the surge in business activity in the services sector to a six-month high, the U.S. GDP in the third quarter may expand by 3% or more. What's the point of selling the dollar? It's much more interesting to acquire securities denominated in it. The capital flow to North America has supported and will continue to support the "bears" on EUR/USD.
The ECB, on the other hand, can only sympathize. On the one hand, the European Central Bank is obliged to maintain "hawkish" rhetoric in the face of inflation exceeding 5%. On the other hand, the higher the interest rates rise, the greater the chances of a recession in the eurozone economy.
Technically, on the daily chart of EUR/USD, the inability of the "bulls" to hold onto the key pivot level of 1.0715 indicates their weakness. The decline of the pair to 1.066 and 1.0595 continues. The recommendation is to hold shorts.