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EURUSD forecast for 31.08.2020

August 31, 2020

August 31, 2020

EUR/USD forecast: Dollar is leading the packDmitri Demidenko

Fundamental US dollar forecast for today

Central banks are going along the same path; it is difficult for one

of them to get ahead of all the others

The US dollar could be running down for the fourth consecutive month, which would be the longest drawdown since the summer of 2017. Societe Generale says the market is at the very beginning of a multi-year weakening of the greenback from very high levels. The [EUR/USD][1] should be trading at 1.25 by September 2021. State Street Global Advisors believes that the USD index has slipped into a bear market and will be 15%-20% down in the next five years. JP Morgan suggests high COVID-19 infection rates and the political environment set the dollar back.

Jerome Powell’s speech at the virtual meeting in Jackson Hole also spurred the EUR/USD rally. The Fed’s plans to start targeting the average PCE hit the greenback. If the US central bank is willing to put up with the high inflation rate in the future, investors won’t believe in the US dollar as a saving means. It would be strategically expensive for a global reserve currency. Nevertheless, to speak about high inflation doesn’t mean to reach it. The Federal Reserve could manage excessively high prices in the 1970s only at the cost of two recessions. Besides, online shopping, outsourcing, population aging, and other factors suppressed inflation even in the period of the rapid GDP expansion.

There are also questions for the new Fed strategy from mathematics. What period to take for calculating the average? If it is since 2012, when the central bank first announced its 2% inflation target, then the PCE should be 3.2% in the next five years. If the reference point is the moment when Jerome Powell was appointed as the Fed’s Chair, then the average PCE will be 2.3%. If the calculation period is the last five years, then the average inflation target will be 2.5%. The US central bank may not wait until the inflation reaches the indicated values to hike the federal funds rate.

Furthermore, central banks tend to follow the same path, like a pack. It means a central bank is unlikely to pursue a monetary policy, which is different from other leading central banks. The Fed switched to the average inflation targeting following a strategic review of monetary policy. The same review will soon appear on Christine Lagarde’s table. Also, euro-area inflation has long required decisive measures from the ECB.

Dynamics of euro-area inflation, ECB balance sheet, and ECB balance

rate

![LiteForex: EURUSD forecast for 31.08.2020][2]

Source : Bloomberg

If the Fed can say, “We may have been too aggressive last time, we will wait longer this time.” How will the European Central Bank respond? “We have waited forever and will wait forever”? Moreover, there is a dispute among the members of the Governing Council. The Bundesbank has always opposed monetary policy easing. The central bank of Austria has raised the issue of a lower inflation target. The ECB could choose a more flexible strategy. The European Central Bank can stop acting proactively and increase the deposit rate after the CPI reaches 2%.

This scenario, compared to the Fed’s current monetary policy, is a bullish factor for the euro. However, the talks about a change in the ECB approach to the inflation targeting and the concerns about the second wave of COVID-19 in Europe can set the [EUR/USD][1] rally back in the short run. Investors could sell the euro-dollar on the rise to 1.2025 and 1.2065, or if the pair drops below 1.1865.

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Price chart of EURUSD in real time mode

![EUR/USD forecast: Dollar is leading the pack][5]

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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