FX.co ★ The Dollar Will Return to the Back Alleys

Two in favor, two against. Groups of opposing factors continue to influence EUR/USD. As a result, after volatile movements in early November, the main currency pair tends toward consolidation. Markets are no longer discussing a coordinated currency intervention at Mar-a-Lago aimed at weakening the U.S. dollar, similar to the Plaza Accord in 1985. Doubts about a Federal Reserve rate cut also support the greenback. However, it has serious vulnerabilities as well.

In the first half of the year, Donald Trump often talked about the excessive strength of the American currency, which negatively impacts competitiveness. He urged the Fed to follow the European Central Bank's lead, which has cut rates eight times in this cycle. Now the president has other concerns. A defeat in the Supreme Court and the recognition of tariffs as illegal are looming. Judging by the positive dynamics of international trade, they currently have a negligible impact. This is good news for export-oriented regions, including the euro.

Dynamics of International Trade

At the turn of October and November, the U.S. dollar was supported by the shutdown and the related reevaluation by FOMC members of the trajectory of the federal funds rate. Most officials expressed concern about high inflation, which caused the futures market to lower expectations for sharp borrowing costs in December from over 90% to 62%. As a result, EUR/USD quotes plummeted to a minimum level not seen since early August.

According to Credit Agricole, the resumption of government work confirmed the weakness of the U.S. economy. Data from alternative sources signal a cooling labor market. If BLS reports indicate the same, the Fed will have no choice but to continue lowering rates.

The shutdown makes investors cautious, leading to a significant drop in Forex volatility. Whereas in previous times the American dollar benefited from such situations, the circumstances have changed. If it weren't for the low volatility of currency quotes, traders would be selling the significantly battered trust-lost greenback.

Currency Market Volatility Dynamics

The resumption of government work may become the trigger that allows EUR/USD to restore an upward trend in the medium term. Statistics will again begin to flow into financial markets, risk appetite and volatility will rise, and investors will recall the U.S. dollar's weaknesses, such as a freezing labor market and loss of confidence. The Supreme Court verdict on the illegality of tariffs may bring about the latter.

Trump sometimes says shocking things; however, in some respects, the president is right. The return of revenue from import tariffs will be a disaster for the U.S. The world will laugh at America.

Technically, an inside bar has formed on the daily chart for EUR/USD. It makes sense to set pending buy orders at 1.158 and sell orders at 1.154.