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EURUSD forecast for 05.05.2020

May 5, 2020

May 5, 2020

Dollar is patching up the holesDmitri Demidenko

The USA needs higher geopolitical risks to lure back the buyers of

Treasuries

The stabilization of the US stock market is not the reason to sell the US dollar. The euphoria about a soon reopening of the US economy has driven the US stock indexes too high. A gloomy reality will make the speculators exit longs and take the profits. This may result from the escalation of the US-China trade war. Following the pandemic and the economic recession, geopolitical tension is a new shock for the financial markets. This is a strong barrier to the global economic recovery, the uncertainty doesn’t ease, and so investors won’t get rid of the safe-haven assets.

The strongest market moves occur when the fear is replaced by greed, or the euphoria is replaced by the pessimism resulted from the gloomy reality. The S&P 500 has risen from the March’s low by 30%, and fund managers invested about $1.1 trillion in the money market, having boosted their asset holdings up to the record highs. However, according to Societe Generale’s research, the typical bear market has been slower to rebound from the bottom, averaging an 11% gain in the first three months after the shock. It is now rising much faster, which I believe to result from the huge fiscal and monetary stimuli and the hopes for the V-shaped rebound of the US economy. The latter is, however, getting less and less likely.

Dynamics of the assets held by the money market funds

![LiteForex: EURUSD forecast for 05.05.2020][1]

Source: Reuters

According to P Morgan, risk assets will be 10% down if the US increases the tariffs on China’s imports, and this will be just the beginning of the end. Does Donald Trump need it? The guilty has been found, however, the US-China trade war escalation will weigh on the US stock indexes, which the US president believes to demonstrate his political performance and his success as the president.

On the other hand, the US needs to cover the budget deficit. The huge fiscal stimulus costs a lot. The U.S. Treasury Department plans to increase the issuance of government bonds to $3 trillion in the third quarter, which is much higher than the previous record borrowing for a full fiscal year of $1.8 trillion in 2009. In 2019, it was $1.28 trillion. To attract foreign investors, the U.S. needs a high demand for safe-havens and a stable local currency. The first goal should be reached through continuous uncertainty and an increase in volatility. The second task can be solved as Donald Trump is back again to the policy of a strong dollar, pursued by former US administrations.

Dynamics of CBOE volatility

![LiteForex: EURUSD forecast for 05.05.2020][2]

Source : Bloomberg

While the greenback is searching for reasons to launch a new attack, the euro is pressed down by pessimistic forecasts for the euro-area economic performance and the expectations for German’s Federal Constitutional Court’s decision on the euro-area QE. According to the median gauge of the 57 economists surveyed by the ECB, the euro-area GDP will be 5.5% down in 2020, and it will only rebound by 4.3% in 2021. UniCredit believes the German judges will approve the ECB’s QE plan. If it isn’t so, the Eurozone will face a disaster. The [EUR/USD][3] has been down below 1.0965, which means the bulls are weak. Will the euro bears go ahead?

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Price chart of EURUSD in real time mode

![Dollar is patching up the holes][6]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. 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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