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EURUSD forecast for 04.06.2020

June 4, 2020

June 4, 2020

Dollar is carried away by injectionsDmitri Demidenko

The Fed may have overdone it with cheap liquidity. Could it crash the

greenback?

They wanted the best, and you know the rest. The Fed surprised investors with the huge monetary stimulus as a response to the pandemic, which has resulted in the fact that the markets are disconnected from reality. Markets ignore US poor domestic data and weak corporate reporting, and the stocks continue rallying up amid huge injections of liquidity, which could be associated with morphine injections for the patient. The Federal Reserve has managed to calm the markets down, but investors wonder now whether the central bank has overdone with it. Will the cheap money turn the recent USD decline into a crash?

In spring, the Fed’s balance sheet was 70% up to more than $7 trillion, the ECB balance sheet increased by 18%, the BoJ’s – by 8%. Naturally, the greenback has lost its shine under those conditions. The dollar’s weakness is further evidence that the global economy is recovering. During the recovery periods, the safe-haven demand is falling, it makes no sense to hold big shares of safe havens in the portfolios.

Dynamics of the Fed’s balance sheet

![LiteForex: EURUSD forecast for 04.06.2020][1]

Source: Bloomberg

The US stock indexes are rising as investors believe in a soon economic rebound. The US PMI has been up from April’s low, the ADP report on the US private-sector employment is stronger than it was expected. Moreover, investors expect that the US new weekly jobless claims should fall below 2 million for the first time since March. The global risk appetite is increasing, investors are willing to sell off safe havens, which is an important growth driver for the [EUR/USD][2]. The euro is also supported by the optimism about euro-area unity.

One of the most important factors pressing the euro-dollar down in spring was quick measures taken by the Fed and the White House to support the US economy. The huge fiscal and monetary stimuli reassured the markets, suggesting the idea that the worst can be avoided. The EU, on the contrary, was very slow to act, which resulted in gloomy projections for the euro-area economy amid a difficult epidemiological situation.

Everything has changed at the turn of May and June. The Fed didn’t take additional measures, estimating the effect of the monetary expansion. The White House and Congress are failing to find a compromise on the expansion of the stimulus package. The EU, on the contrary, is now acting quickly and decisively. According to UniCredit Bank, taking into account the issuance of bonds worth €750 billion by the European Commission and the expansion of Germany’s aid package by €130 billion, the total size of the euro-area fiscal stimulus is about €1.5 trillion, which is 13% of the GDP. Furthermore, the ECB meeting on June 4 may boost the QE by another €500 billion, so that the total size of the program will be €1.6 trillion.

Dynamics of euro-area QE

![LiteForex: EURUSD forecast for 04.06.2020][3]

Source: Bloomberg

In my opinion, the ECB governors should take active measures now, even if they don’t need to use the entire package. It is better to meet market expectations now. If investors do not get what they want, they could start exiting the [EUR/USD][2] longs. I think we should also exit a part of the euro longs now. The target at $1.124 has been reached.

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Price chart of EURUSD in real time mode

![Dollar is carried away by injections][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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  1. cdn.liteforex.com/cache/uploads/blog_post/eurusd/fed-reserve-balance-04-06-20.jpg?w=30&s=d5c54b1ac7dd4696c99e9d84fbfb6133
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  3. cdn.liteforex.com/cache/uploads/blog_post/eurusd/euro-qe-04-06-20.jpg?w=30&s=9d943dc3567db2a874b00e9b5f1001ac
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  6. cdn.liteforex.com/cache/uploads/blog_post/eurusd/liteforex-blog-eurusd-04-06-20.jpg?q=75&w=1000&s=c3ecf25b4f63c3abae4177caadfd6970