11.04.202304:58 Forex Analysis & Reviews: The euro is late, but promises to catch up

Someone clearly went crazy. Either it's the US Treasury bond market, whose yields collapsed at the fastest pace since 1982 in response to the bankruptcy of American banks, or it's the stock market, which is as calm as a cucumber. Will there be a recession in the US economy or not? The answer to this question is extremely important for EURUSD.

Dynamics of US Treasury yield

If you look closely at the EURUSD chart, you can easily see that the fluctuations of the main currency pair have a cyclical nature. Upward movements through several months or years alternate with downward movements. Such dynamics are based on the lagging economic cycle in the eurozone compared to the United States. American inflation began to accelerate faster than European inflation. The Federal Reserve began to tighten monetary policy earlier than the European Central Bank. The recession in the US should also occur before the currency bloc experiences a downturn. This factor is currently the basis of the EURUSD uptrend.

If the Fed started earlier, it should also end its tightening cycle earlier than its colleagues in Frankfurt. It is not surprising that amid slowing inflation, the futures market is betting that Fed Chairman Jerome Powell and his colleagues will end monetary tightening in May. Or they have already done so. Unlike the ECB, from which the market expects another 2 or 3 acts of monetary tightening.

In theory, this means that over the next year and a half to two years, the euro will strengthen against the US dollar, just as the greenback rose against the single currency before. However, in practice, it is not always as simple as it seems. US inflation can easily accelerate amid a strong labor market and a rapid recovery of the sectors most affected by the pandemic. In the forex market, there is an opinion that in addition to the classic cycle in the United States, there is also a COVID cycle. Its presence helps to understand why bonds signal a recession while stocks do not.

Volatility of US debt is currently at a new high, with the spread between it and its stock market counterpart reaching its highest level since the 2008 global economic crisis. However, every new day without alarming news from American banks reduces the risk of a decline.

Dynamics of the bond-stock volatility spread

Therefore, the overall trend for EURUSD is clear, but we could still witness some surprises. In my opinion, the risks of a new extreme in US consumer prices are overestimated. There cannot be strong inflation in a weak economy. Judging by the data on business activity, labor markets, and real estate, the US is cracking under the pressure of aggressive monetary tightening. This means that the pace of CPI and PCE growth should also fall.

Technically, on the daily chart, EURUSD is experiencing a correction to the long-term uptrend. Rebounds from pivot levels at 1.083, 1.08, and 1.0755, where moving averages are also located, should be used to form long positions.