US dollar price forecast 9 December 2020

2020-12-09

ECB can’t handle the dollar. Forecast as of 09.12.2020Dmitri Demidenko

How powerful is the European Central Bank? The idea to weaken the euro by means of QE boost and verbal interventions looks dubious. However, it could be effective relative to the dollar. Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Weekly US dollar fundamental forecast

If the ECB can’t set back the dollar bears, it could give the bulls a new advantage on other currencies trading against the euro! After all, the euro area trades not only with the USA but with the entire world, so the exporters should not be concerned with the [EURUSD][1] rally. The trade-weighted euro exchange rate is only 0.5% higher than the ECB estimate for 2021. Christine Lagarde could sound dovish and encourage the buyers of the emerging markets’ currencies to go ahead.

Dynamics of [EURUSD][1] and trade-weighted euro

Source : Nordea Markets.

The 8% strengthening of the euro against the US dollar is the main reason for the deteriorating financial conditions, which is negative news for the deflationary euro-area economy. The ECB is dissatisfied, but it will hardly succeed in weakening the euro by verbal interventions or the expansion of QE, which has already been taken in the [EURUSD][1] quotes. This is due to the weak dollar, which is sensitive to the US stock indices’ trends. The US stocks, in turn, responsive to the news from the US Congress.

Dynamics of [S&P 500][2] and USD

Source : Trading Economics

Hardly had the Senate Majority Leader Mitch McConnell rejected the offer of a $908 billion stimulus package when the [S&P 500][2] dropped. Next, the White House offered a new project for $916 billion, including the issues of financing local authorities important for Democrats and the problem of protecting the rights of enterprises’ liability, which is fundamental for Republicans, and McConnell accepted it. The stock index hit a new all-time high in response. McConnell seems to be an essential person for the financial markets.

In 2021, the situation may change radically. There are currently 48 Democrats and 50 Republicans in the Senate. If the two remaining seats are taken by “donkeys,” power will pass to Vice President Kamala Harris. If the elephants get even one seat, McConnell will continue to set back Joe Biden’s attempts to expand fiscal stimulus. In the first case, new economic aid packages, a reflationary environment, a continuation of the [S&P 500][2] rally, and the greenback drop should follow. In the second scenario, due to the growing uncertainty, the dollar may strengthen.

After all, investors are now focused on the ECB meeting. The risk of the interest rate cut is low, while the probability of the dovish stance is extremely high. I do not think the ECB will raise the issue of debt cancellation, which has been suggested by analysts. They say the national debt will grow by € 1.5 trillion due to the pandemic and, for the first time, exceed the size of GDP. Why doesn’t the regulator write off the bonds purchased under QE or replace them with perpetual bonds?

Weekly[EURUSD][1] trading plan

I suppose Christine Lagarde should return to this issue but not on December 10. The ECB should now focus on the euro weakening at least versus the emerging markets’ currencies. The ECB can’t handle the dollar. Moreover, if the [EURUSD][1] grows above the resistance at 1.2135, it could continue the rally. I wouldn’t rush to enter new longs, however. I’d rather expect the press-conference following the ECB meeting and buy the pair on the price fall.

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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