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US dollar price forecast October 12 2020

2020-10-12

2020-10-12

Dollar follows the stock market. Forecast as of 12.10.2020Dmitri Demidenko

Joe Biden’s rating is growing, and the uncertainty around the US presidential election is easing. The US stock indexes are rising, which weakens the US dollar. Let us discuss the dollar outlook and make up a [EURUSD][1] trading plan.

** Weekly US dollar fundamental forecast**

The ECB attempts to weaken the euro fail. Philip Lane says the ECB already pursues an inflation strategy similar to the Fed. The European Central Bank is unwilling to tighten monetary policy until the inflation growth is reflected in the economic data. Nonetheless, the [EURUSD][1] doesn’t react to the ECB’s chief economist’s speech and consolidates above figure 18 bottom. According to the HSBC, fiscal policy is currently the main factor in the financial markets, and central banks must admit that they have lost some power.

Although the United States has invested in its economy more money than most other countries in the world and significantly more than during the previous economic crisis, the fiscal stimulus tends to exhaust quickly. The euro-area governments continue to support small businesses and individuals, while the US policymakers can’t reach an agreement on its extension. The new $1.8 trillion stimulus plan offered by the Republicans is the largest in scale and contrasts with Donald Trump’s recent announcement to end negotiations with Democrats. However, House Speaker Nancy Pelosi rejects it, calling the plan insufficient.

Sizes of fiscal stimulus

Source : Bloomberg

Some analysts suggested the new Republican proposal fueled the rally of the US stock indexes. The [S&P 500][2] was 3.8% up in the week through October 9, having featured the best performance since July. I believe the US stock market is rising as the uncertainty around the US presidential election is lowering. Joe Biden’s chance to win is rising, and his victory shouldn’t be such a disaster for the US stock indexes as expected earlier.

According to RealClearPolitics, the gap between Biden and Trump is 9.6 percentage points. For comparison, in 2016, Hillary Clinton was 5.8 pp ahead of Donald Trump three weeks before the vote. JP Morgan suggests the corporate tax hike in the case of Joe Biden’s victory will temporarily hinder the US stock market. The higher tax rate will take effect on January 1, 2022, and the [S&P 500][2] is likely to face a storm in the fourth quarter of 2021. However, as the experience of 1987 and 2013 shows, when taxes were also increased, the storm would not last long. After the correction, the bulls should resume the uptrend.

S&P 500 reaction to a corporate tax hike

Source : Bloomberg

I believe the US stock market trend is a significant driver for the [EURUSD][1]. Ahead of the US presidential election, the pair follows the US stock indexes, mostly ignoring the ECB verbal interventions, the second COVID-19 wave, and the euro-area economic data.

Weekly[EURUSD][1] trading plan

The US dollar is a more significant Forex currency than the euro, so the ECB willingness to weaken the euro alone is not enough to discourage the EURUSD bulls. Amid the growth of Joe Biden’s approval rating, the [EURUSD][1] should continue rallying up to 1.1865-1.188. However, Donald Trump is not giving up yet, so one could sell on the price rise.

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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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