EURUSD forecast for 03.07.2020

July 3, 2020

Dollar throws a loopDmitri Demidenko

Fundamental US dollar forecast for today

US economy faces a negative feedback loop

“The weaker is the economy, the stronger is the currency”. This is the principle, according to which the US dollar is trading after the Fed has cut the interest rates, turning the USD into a major safe-haven. US weak domestic data have strengthened the dollar and vice versa. The US jobs report signaled that the greenback can be rising even if the economic data are strong. “The stronger is the economy, the stronger is the currency”. It is just because the situation could be worse tomorrow. The US economy faces a negative feedback loop. The increase in the employment rate results in a jump of new COVID-19 cases, which is likely to cause the loss of jobs soon.

The decline in the unemployment rate from 13.3% to 11.1%, the growth of non-farm payrolls is a record single-month gain since the records started in 1939 (+4.8 million), and an increase in the number of people receiving unemployment benefits from 59,000 to 19.3 million suggest two controversial scenarios. The first two indicators signal a V-shaped recovery of the US economy, the latter one shows that people are still being fired. However, the employment rate fails to reach the levels recorded in February by approximately 14.7 million (9.6%), and unemployment, according to forecasts of the Congressional Budget Office, will not be able to return to the level of 3.5%, which was before the pandemic, until the end of the next decade. CBO expects to see unemployment at 10.5% at the end of 2020.

Dynamics of U.S. employment

![LiteForex: EURUSD forecast for 03.07.2020][1]

Source: Bloomberg.

In June, about 40% of the increase in payrolls was led by leisure and hospitality. The report of the Labor Department considers only the first half of the month, so there can well be a jump in new coronavirus cases in the second half. The opening of hotels and restaurants is the best environment for the coronavirus spread. The US has entered a negative feedback cycle when a return to work results in a deterioration in the epidemiological situation. The greater is the employment growth, the more there are new COVID-19 cases. Until the pandemic is under control, the US economy won’t recover. The US jobs report for June could be the last positive reading before a deeper downturn. In July, the data could show a different picture.

Dynamics of new COVID-19 cases in the USA

![LiteForex: EURUSD forecast for 03.07.2020][2]

Source: Financial Times.

The upcoming negative feedback loop “higher employment-more coronavirus cases-lower employment” breaks the major investment idea of the past three months, associated with a rise of the global risk appetite. That is why the correlation of the [S&P 500][3] and the US dollar is getting weaker, and the [EUR/USD][4] bulls have failed to break out the resistance at 1.129. If the US economy is strong today and weak tomorrow, the rally of the US stock can quickly turn into a fall. The markets are rising on the expectations, and, when the expectations are negative, it is better to be careful.

The Forex market is entering a period when the expectation of a disaster (a W-shaped rebound of the US economy) is scarier than the disaster itself. It is a favorable environment for the greenback. The US stock market, as well as the euro, can only be supported by the coronavirus vaccine. Until then, the breakout of the support at 1.122-1.1225 will make the [EUR/USD][4] more likely to roll down to the important levels of 1.119 and 1.117.

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Price chart of EURUSD in real time mode

![Dollar throws a loop][7]

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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