US dollar price forecast September 18 2020

2020-09-18

Dollar goes against the crowd. Forecast for 18.09.2020Dmitri Demidenko

[EURUSD][1] is going up despite the ECB verbal interventions and the Fed tone, not dovish enough. I will cover the reasons for the euro rally. In the end, I will offer the [EURUSD][1] trading plan.

Fundamental US dollar forecast for today

The market often penalizes for being overconfident. I accurately anticipated the Forex market reaction to the ECB meeting, suggesting one could sell the [EURUSD][1] on the rise above [1.19][2]. I also predicted the market trend after the Fed meeting, offering to enter shorts on the price fall below the [bottom of figure 18][3]. However, in both cases, the major currency pair didn’t continue falling. It could have looked strange amid the dovish stance of the Governing Council members and the drop of the US stock indices but for the understanding of the market general sentiment. Investors believe in the long-term bullish outlook of the euro and enter longs on the drawdowns.

If the market doesn’t go where it is expected to, it must be going in the opposite direction. The [EURUSD][1] should have been deeply corrected for several reasons. The ECB wants to weaken the euro, Jerome Powell is not dovish enough, the Fed’s new policy of the average inflation targeting is not yet clear. Speculators, having accumulated the maximum net shorts on the US dollar since 2011, should have started exiting the trades at the first signs of trouble. However, the majority of traders were buying out the euro on the price falls.

Dynamics of USD and dollar speculative positions

Source : Bloomberg

[EURUSD][1] bulls have many reasons to buy the euro. First, it is the Chinese economic recovery. China, unlike most advanced economies, featured the GDP growth in the second quarter, which is an important driver for the export-led euro-area economy. Second, the world’s central banks diversify their Forex reserves in favor of the euro. Third, the euro-area economy is recovering faster than the US growth, which is signaled by Bloomberg’s leading indicators. And, finally, the Fed is willing to weaken the dollar.

Recovery trends of major global economies

Source : Bloomberg

The Federal Reserve is willing to put up with the inflation above its 2% target, but it can’t make prices grow. The optimal option is to improve financial conditions. The US central bank seems to be successful. However, the strong greenback hinders the Fed’s policy. Although Jerome Powell says the Fed has more monetary tools, investors doubt it. The Federal Reserve has already lowered the interest rate to zero, it is buying $100 billion of assets per month. As for the increase in the volume of lending, you can lead the horse to the water but you can’t make it drink. The Treasury gave the Federal Reserve $ 75 billion in loans to small and medium-sized businesses, of which only $ 2 billion was used.

Dynamics and structure of the US financial conditions

Source : Nordea Markets.

[EURUSD][1] trading plan today

The central banks can influence the markets only by the words now. Jerome Powell used the word “powerful” 10 times in the press conference following the FOMC September meeting. “This very strong forward guidance, very powerful forward guidance that we have announced today will provide strong support for the economy,” Fed’s Chairman told reporters. Investors believe these words. They do not want to go against the Fed and continue buying the [EURUSD][1]. If the price breaks out the resistance levels of 1.19 and 1.192, it will continue to rally up.

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Price chart of EURUSD in real time mode

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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