Fundamental US dollar forecast for today
Limited depth of the S&P 500 correction, the rebound of the euro-area GDP, and old patterns support the EUR/USD
The best way to predict the future is to create it. The Fed believes the US GDP will take a long time to recover, but the White House still hopes for a V-shaped recovery. But both Jerome Powell and Steven Mnuchin are doing their best to support the US economy. The Fed’s Chairman announced the Fed should lower the minimum loan size, which will improve the ability of the Main Street Lending Program to support the businesses. The Treasury Secretary expressed the intention to expand the fiscal stimulus by late July. The U.S. consumer sentiment index has performed the biggest monthly rise since 2011. Senate passed the extension of the Paycheck Protection Program until August 8. Amid the above positive factors, the US stock indexes stabilized at the end of the second quarter, and so, the EUR/USD has not dropped below the bottom of figure 12.
Dynamics of the US consumer sentiment index
In the April-June period, the S&P 500 rose by 20%, which is the best performance since 1998. Although the deterioration of the epidemiological situation set the US stock buyers back, the major bullish factors still work. The cheap liquidity and hope that the worst has been over can push the US stocks up. Donald Trump is also interested in the rise of the stock indexes. History proves that the current party in power won the election in 87% of cases if the S&P 500 grew, but did not decrease, over the three months before the voting date. According to the most recent survey by the American Association of Individual Investors (AAII), just 24% of investors are bullish. That’s well below the historic average of 38%. If there is good news about the coronavirus vaccine, there will be more buyers.
Quarterly dynamics of the S&P 500
Source: Wall Street Journal
The S&P 500 price trends have a significant impact on the US dollar and the EUR/USD moves, especially now, when the greenback is the major safe-haven due to the Fed. The euro bulls would be discouraged without the support of the US stock indexes. However, the depth of the stock market correction is limited, so the EUR/USD bulls still hope to continue the rally. Especially since the single European currency has its own benefits as well.
The euro-area is gradually defeating COVID-19, and it could follow the example of China’s economic recovery, as China has won the fight with the coronavirus earlier. China’s manufacturing PMI was up to its three-month high in June. China Purchasing Managers Index has been above level 50 since March, which means the economy is expanding. Although the recovery process is not fast in China, it should take a shorter time in the euro area amid the huge stimulus of the EU governments and the ECB.
Dynamics of GDP growth in China and other countries
Source: Financial Times
The divergence in economic growth is an important factor in Forex pricing. We should not also forget about psychology in trading. The daily EUR/USD price chart shows the so-called golden cross candlestick pattern, when a relatively short-term moving average, the 50-day MA, crosses above a long-term one, the 200-day MA. According to BofA Merrill Lynch, the euro rose in 5 out of 6 cases in 45-50 days after such a signal. The use of old patterns encourages the bulls to hold the longs, supporting the consolidation in the range of 1.117-1.129.
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Price chart of EURUSD in real time mode
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