US dollar price forecast October 6 2020

2020-10-06

Dollar: was there a fact? Forecast as of 06.10.2020Dmitri Demidenko

Despite the uncertainty, the [EURUSD][1] pair is rising as Joe Biden is more likely to win the election. Trump is not going to give in and could resort to political tricks. I will speculate about these issues and offer a [EURUSD][1] trading plan.

Fundamental US dollar forecast today

The US dollar quickly responds to changing market conditions. It strengthens during the period of uncertainty, serving as a safe haven. It stays aside when investors are optimistic about the future of the world economy. US presidential election is a source of the market turmoil, so the greenback forgets about economic performance and responds to the candidates’ approval ratings. According to the polls by the Wall Street Journal and NBC News, Joe Biden has become 14 basis points more popular than Donald Trump after the debate. This is the widest gap in 2020. The previous high of 11 basis points was recorded in July.

Over the past three presidential campaigns, the US dollar was strengthening in October amid a US stock indexes drawdown and political uncertainty. On the contrary, at the end of the fourth quarter over the past 10 years, the USD index and the [S&P 500][2] added 1.7% and 1.9% on average. Besides, the IS stock market usually outperformed foreign peers. The positive correlation was supported by the US economy’s leading growth and using the greenback as an income-generating currency in carry trades. In October ahead of the presidential election, the correlation between the USD and the [S&P 500][2] was negative.

Dynamics of correlation between the US dollar and the [S&P 500][2]

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Source : Bloomberg

The Fed’s aggressive monetary expansion made the dollar less appealing for carry traders. According to Chicago Federal Reserve Bank President Charles Evans, if the central bank had used the average inflation targeting policy earlier, a part of the interest rates hiking in 2015-2018 might not have taken place. The greenback can’t follow up on the growth of the US stock indexes any longer only because the Treasury yields are higher than their peers in the advanced economies. The USD can now benefit only from the divergence in the economic expansion.

This fact is included in the forecasts of the Reuters experts. 54 out of 75 specialists believe the dollar won’t be rising for more than three months. 13 analysts are sure the greenback’s rally has been already over. The median gauges on the [EURUSD][1] are 1.18 and 1.21 in 3 and 12 months.

Forecasts for EURUSD and Treasury yields

Source : Reuters

The Forex turmoil is not likely to last for a long time. There are several reasons for the soon improvement of market conditions. Trump is recovering, Joe Biden’s approval rating is increasing, and investors have a different view of the influence of Biden’s victory on the financial markets. The return of the US president to the White House will eliminate the disputes with the US administration. Joe Biden’s victory is likely to result in adopting the additional fiscal stimulus by the Congress, which is positive for the [S&P 500][2].

[EURUSD][1] trading plan today

What can support the greenback? The agreement on the additional financial assistance between the Democrats and the Republicans and the sympathy with Trump because of his illness. Both facts can raise Trump’s rating, and so support the US dollar. If so, there is a reasonable question. Was Trump really ill with COVID-19? While investors are discussing this topic, the [EURUSD][1] might test the resistance zone of 1.179-1.18. In case of a successful test, the pair can well continue the rally to 1.1865-1.1875.

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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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