No matter how much the rope twists, there is always one end. The EURUSD has emerged from consolidation and is confidently moving towards restoring its upward trend amid growing global risk appetite, divergence in economic growth and monetary policy. Tariffs are being imposed on Americans, which, coupled with the White House’s anti-immigration policy, is cooling the labor market and slowing down GDP. New nails in the coffin of the greenback are added by the increase in hedging by non-residents and the pressure of Donald Trump on the Fed.
According to Deutsche Bank research, for the first time in a decade, flows to ETFs that buy U.S. assets with currency risk hedging exceed flows without their insurance. We are talking about 80% of the flows related to stocks and 50% to bonds. These processes help explain why the US dollar is weakening, despite the growth of investments by non-residents in United States securities.
According to JP Morgan Asset Management, the greenback may weaken further if, following the September FOMC meeting, investors decide that the Fed’s rate cut verdict was the result of political pressure. Donald Trump predicted a big cut in the federal funds rate, as there are suitable conditions for this. Congress has approved Stephen Miran for the post of FOMC governor, despite the fact that he is not leaving the American administration.
The cautious tone of the Federal Reserve, according to Morgan Stanley and JP Morgan, could bring fears of a slowdown in the US economy back to the market and hit the dollar. By itself, a 25bp cut is unlikely to help the American labor market. The slower the central bank moves along the road of monetary expansion, the more likely it is that it will freeze and a recession will come to the United States.
On the contrary, if the Fed accelerates the process, the markets will be convinced of their rightness. They expect the federal funds rate to drop to less than 3% in the current cycle. We are talking about more than 150 bp. Against the background of the ECB taking a long pause, this will be a death sentence for the “bears” on EURUSD.
Thus, the market is beginning to think that any outcome of the September FOMC meeting will be a blow to the US dollar. In my opinion, the only obstacle to the restoration of the upward trend in EURUSD may be the preservation of the Fed’s June forecast of a rate cut at two meetings of the central bank in 2025. If there are more, the greenback will sink.
In such conditions, it makes sense to hold and continue to increase the long positions formed from 1,165 EURUSD. The initial targets of 1,182 and 1,194 are already close, and then, lo and behold, the long-term target of 1.22 will come true.
