Sage Investment Club

The impact of the approaching recession on the US dollar is ambiguous. Most likely, China will become a safe haven for EURUSD. The rapid recovery of Asia’s biggest economy is a good thing for the euro. Let’s discuss this topic and make up a trading plan.

Weekly Euro fundamental forecast

In 2022, investors were focused on inflation, while its slowdown provided support for stock indices. In 2023, the situation has radically changed. A too rapid decline in producer price growth to the lowest levels since March 2021 marked an approaching recession. Moreover, retail sales in December fell by 1.1%, the worst figure of the year. Now investors are focused on the recession, which makes the EURUSD fluctuate.

EURUSD followed the US stocks, which soared and then collapsed after the release of PPI and retail data. Their dynamics were good news for the Fed, which indicates a slowdown in domestic demand. This attribute is necessary to suppress inflation. No one knows how deep demand will sink, as monetary tightening has been the most aggressive in decades, and its delayed effect on the economy indicates an impending recession. According to 85% of economists surveyed by the University of Chicago Booth School of Business, a recession is inevitable.

The impact of the approaching recession on the US dollar is ambiguous. On the one hand, the USD can take advantage as a safe-haven currency. On the other hand, the factor of American exceptionalism will stop working, and money will flow from North America to Europe and EM. Do not forget about the Fed’s monetary restriction slowing down. Although Bank of America believes that at the turn of 2022-2023, the recovery of reflationary sentiment in China played a greater role in the USD index fall than the Fed’s intention to return to the standard +25 bps while raising rates.

Dynamics of China’s reflation assets and the USD


Source: Bloomberg.

The optimism is rising in the market due to the opening of the Chinese economy. Fear has been replaced by greed amid growing hopes that China will help the rest of the world overcome difficulties. This is facilitated by the positive statements of Beijing officials, as well as the increase in forecasts by Bloomberg experts. They expect GDP to grow by 5.1% and 5% in 2023 and 2024, respectively. Previous December estimates were 4.8% and 4.9%, respectively.

Chinese GDP Forecasts


Source: Bloomberg.

Now Forex resembles the oil market. Fears about a global recession, which will reduce the demand for black stuff, contribute to the EURUSD decline. On the contrary, faith in the rapid recovery of the Chinese economy after the lifting of lockdowns contributes to the growth of Brent demand and the EUR strengthening.

Weekly EURUSD trading plan

It cannot be said that the ECB is not helping the euro. The head of the Bank of France, Francois Villeroy de Gallo, tried to refute the Bloomberg insider about the reduction in the monetary restriction rate to 25 bps in March, saying that future rates are not determined. This is an additional argument in favor of buying EURUSD both on the decline to 1.075 and 1.069, and on growth.

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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