EURUSD forecast for 15.09.2020

2020-09-15

EUR/USD forecast: Dollar sends out an S.O.S.Dmitri Demidenko

Fundamental US dollar forecast for today

If the Fed calls for a fresh stimulus package, the US economy must

be turning down

If the EURUSD bears are supported by ECB that doesn’t want the euro to appreciate, then the bulls follow the Fed. The US Federal Reserve doesn’t yet resort to verbal intervention, but all its actions weaken the US dollar. The [EUR/USD][1] is again at the top of figure 18, as investors worry that Jerome Powell will sound dovish at the press conference following the FOMC September meeting, and the global risk appetite has increased.

The Fed doesn’t like engaging in the political debates, so when it does, investors could see its call for a fresh stimulus package as a distress signal. The disputes between the Republicans and the Democrats, holding back the decision on the further financial aid programs, may completely destroy the US economy by the time when the COVID-19 vaccines are developed. So, the FOMC officials insist on a compromise for a boost in the US fiscal stimulus.

According to Columbia University, when certain sectors of the economy aren’t able to operate for non-economic reasons, a boost in government spending is a more effective tool than the interest rate cuts. Around half of economists surveyed by The Wall Street Journal don’t see the Fed raising rates before 2024. Futures markets show investors expect the first Fed rate increase in the second half of that year. The FOMC interest rate decision will hardly surprise the market. The two Fed’s hawks are likely to lower their forecasts for 2022 to zero.

Previous FOMC projections for the federal funds rate

Source : Nordea Markets

I must admit the Fed has done a great job. It has stabilized the financial markets and sent the Treasury yield to the all-time low. The TIPS yield has gone negative, which makes investors increase the proportion of equities in their portfolios. So, the global risk appetite increases, and financial conditions improve.

While Treasuries stay still in the consolidation, asset managers have to focus on Forex if they want to make profits. The FX volatility is higher than it was twelve months ago. Nomura’s example is indicative. The company bet on the rise of the Treasury yield amid the huge volume of the Treasuries issue in summer. However, when it became clear that the Fed’s purchases of the Treasuries will hinder the yield growth, so Nomura started selling the US dollar.

Dynamics of Forex volatility

Source: Financial Times

Therefore, even if the Fed says nothing about the greenback weakening, it doesn’t mean that it won’t try to do it. The Fed should keep the interest rates low for a long time, the Congress can’t agree on the additional government spending and the upcoming presidential elections are associated with political uncertainty. All of these factors should discourage [EUR/USD][1] bears. [As I noted][2] earlier, if the euro breaks out the resistance at $1.192, it can well continue the rally. The matter is whether the bulls will manage to break the strong level close to 1.2.

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Price chart of EURUSD in real time mode

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