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EURUSD forecast for 18.06.2020

June 18, 2020

June 18, 2020

Dollar puzzles analystsDmitri Demidenko

Forex now is a blatant reflection of US stock market

Every Forex trader must be able to the changing market conditions. Analysts are puzzled as forex rates follow stocks rather than economic fundamentals. Over the decades, forex experts predicted the future trends of the currencies based on the interest rates. The better looked interest rates, the higher could the local currency grow. Now, everything has turned upside down. The GBP is going up amid the growing risk of a no-deal Brexit, the AUD, being rather responsive to the deterioration of the foreign trade, seems to be one of the best- performing currency. The strategists call the current conditions abnormal and put the responsibility on the Fed that has flooded the markets with cheap liquidity.

According to BofA Merrill Lynch’s research, the negative correlation between the S&P 500 and the U.S. dollar has reached the highest value over the past 15 years, turning currency pairs into a “blatant reflection” of US stock markets. Such close ties were short-lived in the past. Last time, this was happening for two weeks in August 2014, and before that, it occurred in September 2009.

Dynamics of the S &P 500 and the USD

![LiteForex: EURUSD forecast for 18.06.2020][1]

Source: Financial Times

My analytics is more flexible. Back in early spring, I stressed the correlation between the greenback and the US stock market amid a sharp cut of the federal funds rate. The Fed turned the dollar into a major safe-haven asset. This, amid the high sensitivity of investors to the risk appetite, made the USD and the S&P 500 be moving in the opposite directions.

Nowadays, the buyers of the equities start realizing that they may have gone too far. They used to bet on the huge monetary and fiscal stimulus, the V-shaped recovery of the US economy, and a soon victory of the coronavirus. However, the Fed can hardly do more than it has already done, Republicans and Democrats can’t find a compromise on the further assistance to the economy. Besides, the second wave of COVID-19 in China and the disease peaks in some US states encourage investors to sell the S&P 500. Especially since Jerome Powell suggests a slow and painful recovery of the US GDP pace.

A correction in the US stock market may lure investors back to the dollar, which has been more sold than bought in recent times. This is evident from the demand for put and call options.

Dynamics of U.S. dollar risk reversals

![LiteForex: EURUSD forecast for 18.06.2020][2]

Source: Bloomberg

The balance of powers in Forex can also be affected by trade wars that will influence the global risk appetite. According to the US Treasury Secretary Steven Mnuchin, the US-EU negotiations on digital tax stalled, and Washington can introduce new tariffs against the EU. On the other hand, The U.S. Trade Representative Robert Lighthizer, says the US has an excellent agreement with China, which in spite of COVID-19, will fulfill its commitments.

I would like to believe in a soon improvement of the epidemiological situation and the end of the S&P 500 correction. This will allow the [EUR/USD][3] bulls to hold up the support at 1.122-1.124. If the support is broken out downside, traders are likely to sell the euro in the short term.

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Price chart of EURUSD in real time mode

![Dollar puzzles analysts][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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