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US dollar price forecast October 1 2020

2020-10-01

2020-10-01

A guiding light for dollar. Forecast as of 01.10.2020Dmitri Demidenko

The Japanese yen was replaced by the Chinese yuan as a currency followed by dollar pairs, which signals the stability of the [EURUSD][1] uptrend. Let us analyze the long-term euro trend and make up a [EURUSD][1] trading plan for half a year.

Fundamental US dollar forecast for half a year

Markets need guides. At the end of the twentieth century, investors were following the yen to anticipate the dollar rates versus the Deutsche mark, the British pound, or the Swiss franc. Nowadays, the yuan is going to play the role of the Japanese yen. The third quarter has been the best for the [USDCNH][2] bears since 2008, while the USD index has had the worst results since September 2017. The correlation between these two assets should strengthen in the next few years, and there are several reasons for this.

In the 1980s and 1990s, Japan was the second-largest economy in the world, and the US had the largest deficit in trade with Japan. If the [USDJPY][3] was falling, investors understood that the US trade deficit couldn’t be funded at the exchange rate prevailing at the time. It caused the greenback to weaken, making US assets more attractive for foreign investors. If so, the greenback should have been falling not only versus the yen but also versus other world’s major currencies. The importance of the Japanese yen proves that the interventions after signing the Plaza Accord agreement were carried out in the [USDJPY][3] pair.

At present, the second-largest economy in the world is China. The US has the biggest trade deficit with China. The past mechanisms could have worked out earlier but for the strict yuan fixing by the PBOC. In 2015 the restriction was eased and the result was immediate. The trade war and the [USDCNH][2] sent the [EURUSD][1] down in 2018-2019.

I am sure the yuan will continue rising. Some of my previous [trading recommendations][4] in the Forex blog worked out. Divergence in economic expansion and monetary policy are the key drivers for the Forex rates. The pandemic only increased their influence on the foreign exchange market. The recent data on China’s PMI signal that the Chinese economy is strong, unlike the US growth.

Dynamics of China’s PMI

Source : Bloomberg

The exhaustion of the US fiscal stimulus and the inability of the Congress to provide a new financial aid package (the project of $2.2 trillion is not likely to be accepted by the Senate), the difficult epidemiological situation in the US, and the Fed’s ultra-easy monetary policy suggest a bearish outlook for the greenback. The USD bulls are now going ahead amid the uncertainty resulting from the upcoming US presidential election. However, the rally of the US stock indexes suggests that the [EURUSD][1] bears are weak. Even Christine Lagarde’s words that the ECB is to follow the Fed’s example do not support the euro bears. The European Central Bank is to consider the possibility of average inflation targeting.

[EURUSD][1] trading plan for half a year

I do not think the euro bears can break the uptrend. They may succeed if the second COVID-19 wave is more severe and the euro-area economies are locked down again. Unless it is so, the [EURUSD][1] price could reach 1.21 and 1.23 in three and six months. The long-term trading idea is to buy the euro.

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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
  2. my.liteforex.com/trading/chart?symbol=USDCNH&returnUrl=true
  3. my.liteforex.com/trading/chart?symbol=USDJPY&returnUrl=true
  4. www.liteforex.com/blog/analysts-opinions/yuan-is-strengthening-forecast-for-24092020/
  5. my.liteforex.com/?category=analysts-opinions&slug=a-guiding-light-for-dollar-forecast-as-of-01102020&openPopup=%2Fregistration%2Fpopup&utm_source=blog&utm_medium=article&utm_campaign=bonus
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