US dollar price forecast 16 December 2020

2020-12-16

Fed and Butterfly Effect. EURUSD forecast 16.12.2020Dmitri Demidenko

The Fed’s passive attitude doesn’t shake the financial market s as a rule. However, investors are so stressed that a single word by Jerome Powell could result in a strong market move. Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Weekly US dollar fundamental forecast

When the financial market’s stress has reached its climax, even an unimportant factor could quickly move it up or down. The rising gauge of momentum inspires the US stocks bulls; bears note the extreme values of positive sentiment, including the excessive call option volumes. The Fed’s meeting could become the butterfly flapping its wings, which will start a wave of purchases or sales all over the world. Much, if not everything, depends on the [S&P 500][2] trend now. The [EURUSD][1] is also very responsive to US stocks.

Dynamics of momentum indicator and the demand for call option

Source : Bloomberg

According to the US stock indexes, investors monitor the global risk appetite, whose growth has seriously weakened the US dollar recently. However, the US long-term economic outlook is bright, while the first quarter will be rather weak, according to the experts polled by the Wall Street Journal. Analysts expect the US GDP to go down to 1.9% in the January-March period, followed by the growth rate rise to 4% in April- June and July-September.

How can the Fed change investors’ risk appetite? The majority of the economists polled by Bloomberg expect the Fed to offer new guidance for its $120-billion asset purchase program. The QE should continue for several months as currently expected; however, investors want the Federal Reserve to link the terms with the inflation rate and unemployment. If the Fed doesn’t meet the expectations, the [S&P 500][2] will go down.

Forecasts for changes in QE guidance

Source : Bloomberg

Nonetheless, the primary driver for the [S&P 500][2] moves, either up or down, is the Fed’s projections for the federal funds rate. The latest GDP forecasts suggest the US growth should contract by 3.7% in 2020 and expand by 4% in 2021. The good news about vaccines gives investors hope that the projections will be revised up. But what will the Federal Reserve do with the borrowing costs? The FOMC median gauge suggests that the interest rate will be at a level of 0%-0.25% through at least the end of 2023. If the FOMC officials hint at an earlier rate hike, it will press the US stock market down and strengthen the US dollar.

Weekly [EURUSD][1] trading plan

Nordea Markets expects that the Fed should start normalizing its monetary policy already in the first half of 2022 amid the quick rebound of the US economy and the inflation growth. I don’t think such a scenario is viable now. Jerome Powell and his fellow central bankers are more likely to wait and see, leaving the door for further monetary expansion open and sticking to the dovish tone. If so, the [S&P 500][2] rally will continue, followed by the [EURUSD][1] rise towards 1.22 and 1.224. However, under the current conditions, it is risky to buy at highs or sell amid the correction expectations. I would rather open long positions on the corrections.

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.

Rate this article:

( {{count}} {{title}} )