Following the release of upbeat data from Europe and a mixed batch of US statistics, EURUSD bulls have mounted a counterattack. However, it is worth questioning whether the divergence in economic growth still favors bears. Let’s discuss this topic and make a trading plan.
The article covers the following subjects:
Highlights and key points
- The eurozone economy expanded by 0.4% in the third quarter.
- The odds of a 50 bp ECB rate cut in December dropped.
- US GDP growth failed to meet expectations.
- The EURUSD may fail to remain in the 1.076-1.0865 range.
Weekly US dollar fundamental forecast
Unpredictability is a hallmark of the foreign exchange market. Unexpected economic data can lead to significant market fluctuations. This is particularly the case when central banks’ monetary policy is data-dependent. As anticipated, the positive economic data from Europe prompted a counterattack by EURUSD bulls. Furthermore, the news from the US was not as positive as expected.
The currency bloc economy unexpectedly accelerated in the third quarter by 0.4%, exceeding the consensus forecast of Bloomberg experts. Germany avoided the widely expected recession, with GDP growth of 0.2%. Inflation accelerated to 2.4% from 1.8%, prompting a more hawkish stance from the ECB.
EU economies’ performance
Source: Bloomberg.
Bundesbank President Joachim Nagel does not recommend accelerating the implementation of monetary policy easing measures, while Isabel Schnabel advocates a gradual approach and asserts that the fight against inflation still has a way to go. Robust economic data and the comments from Governing Council officials reduced the likelihood of a 50 bp cut in the deposit rate in December to 25% from 50%, leading to a significant increase in the value of the euro.
In addition, the divergence in economic growth appears to be narrowing. US GDP slowed to 2.8% from 3% in the third quarter, falling below the 3.1% projected by Bloomberg experts.
US GDP
Source: Bloomberg.
Notably, the acceleration of the European economy was due to one-off effects. Firstly, the Olympics in France had a significant impact. The avoidance of a recession in Germany is not a meaningful indicator. The second quarter saw a 0.3% contraction in GDP, with the 0.2% expansion in the third quarter merely confirming a state of stagnation.
In contrast, the US economy continues to expand above trend, driven by artificial intelligence technology and productivity growth. Between 2009 and 2019, the average rate of GDP expansion was 2.5%. Federal Reserve officials estimate the long-term growth rate to be 1.8%. This provides further grounds for the labor market to remain robust. In October, private sector employment from ADP increased by 233K, representing the strongest performance since July 2023.
The data on the EU and US economies prompted traders to rebalance their positions in anticipation of two significant events: the release of the US labor market report for October and the US presidential election. These events will set the direction of dollar pairs in the foreign exchange market for several weeks or even months. As a result, the cost of hedging against fluctuations in the US currency has risen to its highest level in two years.
US dollar hedging costs
Source: Bloomberg.
Weekly EURUSD trading plan
The EURUSD pair accelerated its ascent, reaching the upper boundary of the consolidation range of 1.076-1.0865. The rebound provided an opportunity to open short positions. However, these trades look rather tenuous at present. The pair may break through 1.0865. If so, short trades can be considered again if the price fails to settle above the resistance level of 1.0905.
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 LiteFinance. 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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