US dollar price forecast 5 November 2020

2020-11-05

Dollar loses confidence. Forecast for 05.11.2020Dmitri Demidenko

Markets rush from the Democrat to the Republican and vice versa, but political uncertainty is likely to persist. Trump has appealed to the Supreme Court for a recount of votes. How will this affect [EURUSD][1]? Let’s discuss it and make a trading plan.

Weekly US dollar fundamental forecast

Who will have the last laugh? Some investors ridiculed the sociologists who predicted Joe Biden’s victory on November 3, but a day later they had to shut up: the Democrat’s chances increased significantly, which led to the fall of the US dollar, while the Chinese yuan, Australian dollar and Mexican peso all skyrocketed… However, the final results have not yet been calculated, the risks of recounts are growing, so it’s too early to laugh.

Markets often make mistakes in politics, but it is rare to see them assess the likelihood of all three presidential outcomes - a Republican victory, a Democrat victory, and a long recount with the Supreme Court involvement. Don’t be surprised at the insane movement of assets: the market has changed its assumptions as to who will win several times. The US dollar has rolled on a roller coaster, while the main driver behind the [S&P 500][2] rally was, at first, technology companies, and then securities of the industrial and consumer sectors.

The fall in Treasury yields is attributed to diminished chances of a massive fiscal stimulus. So far, the most likely scenario is Biden’s winning the seat at the White House, Democrats winning the House of Representatives, though with fewer seats than before, Republicans winning the Senate. If this is the case, then it will be hard to push through the proposed tax increases and increased tax regulation. The risks of radical reforms are decreasing, which cannot but please the market.

US Early Election Results

Source: Wall Street Journal.

What’s next? There are serious concerns that the history of the 2000 election dispute will repeat itself when the [S&P 500][2] fell by 4% between the date of the election and the Supreme Court ruling in mid- December. This time, the losses in the stock index may be more significant, because, according to Monex Europe, current US politics is more polarized.

It should also be noticed that the market cannot be fed only politics for a long time. The fastest growth in business activity in the services sector of the US economy in October since April 2015, according to research by Markit, contrasts with the eurozone, which is on the verge of recession, and the composite PMI of which is stuck at around 50 due to problems in the non-manufacturing sector. Divergence in the economic growth of the Eurozone and the United States signals that one has to start shorting [EURUSD][1].

Dynamics of business activity in the service sector

Source: Wall Street Journal.

The monetary policy indicates the same thing. The Fed does not even think about raising the rates and the maximum it might do at its meeting on November 5 is to change the structure of assets within the QE by $120 billion per month. The ECB is ready to go much further. According to Isabel Schnabel, a member of the Executive Board of the ECB, the eurozone’s economy needs additional stimulus amid the second wave of COVID-19.

Weekly [EURUSD][3] trading plan

In my opinion, the ongoing uncertainty in the US politics, as well as the divergence in economic growth and monetary policy, speak in favour of shorting [EURUSD][1] on the rise in the direction of 1.1795-1.1805 and 1.186-1.187.

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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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