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US dollar price forecast September 25 2020

2020-09-25

2020-09-25

Dollar muddies the water. Forecast for 25.09.2020Dmitri Demidenko

The [EURUSD][1] is likely to be falling until the situation with the fiscal stimulus is clear, and the market turmoil eases. How to trade under the current conditions? A [EURUSD][1] trading plan.

Fundamental US dollar forecast for the month

Uncertainty is the primary driver for the US dollar now. Nobody knows if the Democrats and the Republicans will agree on the fiscal stimulus if the [S&P 500][2] will enter a bear market, or how severe the second wave of the pandemic will be. Naturally, safe havens are mostly demanded under such conditions. Even the Japanese yen can’t outperform the greenback as a safe-haven currency. It is evident from a sharp change of the JPY correlation with the volatility of the US stock indexes. The trends of the stock indices usually indicate investors’ risk appetite.

JPY correlation with the US stock market volatility

Source : Bloomberg.

Democrats prepare a new fiscal stimulus plan of $2.4 billion, which is less than the $ 3.4 billion adopted by the House of Representatives in August, but still far from the amount that the Republicans would accept ($ 1.5 trillion). Furthermore, the [S&P 500][2] couldn’t close the trading session below 10% of the all-time high. These circumstances have weakened the dollar. The USD bounced down from the two-month high, but the dollar bulls are still going to attack. The Republicans and the Democrats are unlikely to find a compromise soon. The proportion of investors who assume that US stocks will fall over the next six months increased from 40% in August to 46% in September. It signals that the correction won’t end soon.

The greenback has many benefits yet. Despite a sharp cut in the federal funds rate, it still has a yield advantage, being outperformed only by the New Zealand dollar among the G10 currencies. Under the current uncertainty, the US dollar doesn’t have strong rivals. It is evident not only from the yen’s weakness but also from the crash of gold, which is a traditional safe-haven asset. Furthermore, the demand for the dollar in the foreign-exchange turnover is exceptionally high. According to the Bank for International Settlement, the volume of the greenback in Forex transactions exceeded the euro’s turnover by two times and the yen by five times in 2019.

Dynamics of foreign-exchange turnover

Source : Bloomberg

In addition to the uncertainty, another driver for the [EURUSD][1] correction is Citi’s recommendation to reduce the proportion of European equities in the portfolios and to increase the share of the emerging markets’ assets. Allegedly, the forecasts for the corporate profits are, most of all, overestimated for the euro-area companies. Moreover, the euro-area economic surprise index could turn negative soon.

Dynamics of economic surprise index

Source : Bloomberg

Weekly trading plan for EURUSD

In my opinion, the [EURUSD][1] is likely to continue falling. The uncertainty won’t ease until there is positive news about the COVID-19 vaccines and the negotiations between the Republicans and the Democrats. It is a good chance for the euro bulls to buy the euro for $1.16 and $1.15.

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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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  1. my.liteforex.com/trading/chart?symbol=EURUSD&returnUrl=true
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