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EUR/USD: Return of recession fears in U.S. could trigger a pullback
October 4, 2023 8:22 pmVideo
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History repeats itself, and sometimes it rhymes. While the yield on U.S. Treasury bonds is at 16-year highs, the 26th anniversary of Black Monday is approaching. On October 19, 1987, the Dow Jones Index plummeted by more than 22%, marking its worst performance in history. Interestingly, there are many similarities between those events and today’s situation. Perhaps historical parallels can help us understand the future dynamics of EUR/USD.
In 1986, inflation in the U.S. was slowing down, and the economy managed to achieve a soft landing. In early 1987, investors believed that a downturn had been avoided, and GDP was picking up momentum. As a result, there was a rapid rally in the yield of U.S. Treasury bonds. Within 33 trading days, the rates on 10-year bonds sharply rose and reached a peak of 10.23%. Today, this is equivalent to 5%. The critical moment could come at the end of October or the beginning of November.
Dynamics of U.S. Treasury Bond Yields
Indeed, from a macroeconomic perspective, the same events are happening today as 26 years ago. In the first half of 2023, investors were almost certain of a recession in the U.S. and bet on the Federal Reserve’s dovish pivot at the start of 2024. Starting in July, their outlook changed dramatically. Inflation is slowing down, and the likelihood of a soft landing is increasing with each passing day. The resilience of the United States to aggressive monetary tightening by the Federal Reserve is impressive, and some economists are beginning to talk about a boom. The final note is the rise in the yield of U.S. Treasury bonds.
Everything could end very poorly if a sudden economic downturn in the U.S. reappears on the agenda. Investors have forgotten about it, but if something shocking happens, they will remember it immediately. This Black Swan event could be the return of concerns about a government shutdown and a downgrade of the U.S. credit rating. However, no one knows exactly what will happen tomorrow.
Dynamics of the Dow Jones Index and Nasdaq-100
For Forex traders, it’s interesting to know what happened to the USD index in 1987. Did it rise as a safe-haven asset amid massive stock market sell-offs? Or, on the contrary, did it fall when U.S. Treasury bond yields plummeted? The correct answer is the latter. The U.S. dollar weakened on Black Monday, giving up its role as a reliable asset to the Japanese yen.
History repeats itself, and a sharp drop in U.S. bond yields could lead to a rise in EUR/USD. However, for this to happen, there needs to be some kind of shock that brings back talks of a recession in the U.S. economy. Investors should be prepared for any situation in Forex.
Technically, on the daily chart of EUR/USD, the bulls have launched a counterattack ahead of the release of important U.S. labor market statistics, prompted by the closure of speculative shorts. Breaking through resistance at 1.052-1.0525 will increase the risk of a correction towards 1.055, 1.0595, and 1.065. This is where traders can transition from short-term buying to medium-term selling.
The material has been provided by InstaForex Company – www.instaforex.com
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