Recent trends in the forex market have shown the US dollar (USD) weakening, especially after the latest US CPI release, suggesting a potential end to the Federal Reserve’s tightening cycle. With the dollar’s decline being broad-based, even currencies like the Japanese yen, which have been relatively unloved, are finding support. However, this shift might be short-lived, as it appears to be more of a reaction to position-unwinding globally rather than a fundamental reassessment of the Fed’s easing cycle.
As we approach the US Thanksgiving holiday, we’re witnessing a temporary unwind of positions, which might mislead some investors into thinking this is a permanent shift. This period of adjustment, influenced by secondary US data and the upcoming release of the 1 November FOMC meeting minutes, might temporarily weaken the dollar. However, it’s crucial to consider this within a larger context.
Despite the current trends, there are several reasons to believe that the Euro will decline against the USD:
- Federal Reserve’s Tightening Not Over: Contrary to the market’s dovish expectations, the Federal Reserve may not be done with its tightening cycle. The Fed’s continued bias towards tightening and the relatively stable short-dated US yields are key indicators that the dollar’s current decline might not be as long-term as some expect.
- European Economic Challenges: The eurozone faces its own set of challenges. The upcoming eurozone November PMIs are expected to be less than favorable. Our eurozone macro team sees little room for improvement, which could negatively impact the Euro.
- Italian Sovereign Debt and Moody’s Rating: While Moody’s Investors Service recently improved the outlook for Italian sovereign debt, this alone isn’t sufficient to bolster the Euro significantly, especially if the broader economic indicators in the eurozone remain subdued.
- Technical Resistance for EUR/USD: There’s notable resistance for EUR/USD around the 1.0950/60 mark. A failure to break this barrier in the wake of the FOMC minute could see the EUR/USD pair settling into a lower range, indicating a potential decline.
In conclusion, while the current market trends suggest a weakening USD, a deeper analysis reveals that this might be a temporary phase. The Euro faces significant hurdles, both in terms of economic indicators and market technicals. Therefore, a contrarian view would suggest that we may see the Euro decline against the USD in the coming period. Investors and traders should be cautious and not be swayed by the short-term trends but look at the broader economic and monetary policies at play.
