The stability of EUR/USD quotes has its temporary limits. US dollar bears prevail on Forex. They expect a reduction in the federal funds rate and an increase in the share of the euro in portfolios. Let’s discuss these topics and make a trading plan.
The article covers the following subjects:
Major Takeaways
- The share of the euro in investor portfolios is close to a record high.
- The Fed will cut the federal funds rate.
- AI is impacting the US economy.
- Long positions on the EUR/USD pair can be opened on a breakout of 1.186.
Weekly US Dollar Fundamental Forecast
It is difficult to be a dollar bull in a world of dollar bears. The answer to the question of where EUR/USD quotes will go depends on the composition of the investment portfolios of major players. According to Bank of America, the euro’s overexposure in asset managers’ portfolios reached 23% on a net basis, the highest level since October 2004. Since July 2024, investors have consistently overweighted the regional currency.
The ECB’s plan to expand its role in the global financial system by offering more liquidity to other countries could push the EUR/USD pair even higher. Gold and foreign exchange reserves are also a kind of investment portfolio owned by central banks. The rise in the euro’s share in these reserves is closely linked to the performance of the major currency pair.
EUR/USD Performance and Share of Euro in Foreign Exchange Reserves
Source: Reuters.
Europe needed to be shaken awake, and that is what Donald Trump did. The United States’ reduction of support for Ukraine prompted the EU to increase military spending and Germany to introduce fiscal stimulus measures. US tariffs forced Europe to look for alternative markets for its exports. The decline in the US dollar’s credibility due to threats to the independence of the Federal Reserve gave the ECB an opportunity to promote the euro.
When asset managers increase the dollar’s share in their portfolios, central banks increase it in their gold and foreign exchange reserves, and money flows from the US to Europe due to stock market rotation, it really does become a world of dollar bears. Moreover, according to 59% of investors participating in a Bank of America survey, Kevin Warsh’s appointment to the Fed will lead to a cut in the federal funds rate.
Warsh is following in the footsteps of Alan Greenspan, who once claimed that computers and the internet would transform employment and business. They would stimulate economic growth without fuelling inflation. Warsh says the same thing about AI.
He already has opponents. FOMC Governor Michael Barr believes that massive investments in AI will increase demand for capital and put upward pressure on interest rates. At the same time, households will reduce their savings in anticipation of real wage growth. This will raise the cost of deposits and loans. In other words, the Fed’s neutral rate may be higher than expected.
US Dollar and Risk Reversals
Source: Bloomberg.
The futures market has not yet abandoned the idea that the Fed will return to a cycle of monetary expansion only in June, which supports the dollar due to the increasing reversal risks. However, the rebound of US stock indices from their lows reduces demand for the greenback as a safe-haven asset.
Weekly EURUSD Trading Plan
The minutes of the FOMC meeting and the US GDP data will help shed light on the situation. Until they are released, it is better to sit on the sidelines. However, if the EUR/USD pair rises above 1.186, it could trigger a rally and offer a solid buying opportunity.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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