US dollar price forecast 18 December 2020

2020-12-18

Dollar: Double, double toil and trouble. Forecast for 18.12.2020Dmitri Demidenko

Forex often surprises us with strange, unexplained things happening on certain days. For example, the days when market index futures, market index options, stock options, and stock futures expire, usually resulting in increased volatility. How will the market react today, on such a quadruple witching day? Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Fundamental forecast for US dollar today

The higher the [EURUSD][1] rises, the dizzier the bulls feel. The euro positions, supported by a Brexit deal and all-time highs hit by the [S&P 500][2], look strong. However, everything could happen on quadruple witching day. I mean, today, December 18, the day when options on the US equities are scheduled to expire. According to Susquehanna, the number of option contracts is up 24% from a year ago. And there are also futures! When everyone is buying, it is an excellent chance to sell. The quadruple witching day (this event is once a quarter) is meant to be the last chance for investors to make major portfolio shifts before liquidity thins out into the Christmas holidays.

Dynamics of S &P 500 and trading volume in stocks

Source: Bloomberg

All the turbulence means headaches for traders, including the euro bulls. The [EURUSD][1] is growing on the investors’ expectations of a soon Brexit deal and the [S&P 500][2] rally amid the hopes for a fresh fiscal stimulus provided by the US government. However, neither of the positive events is guaranteed. Britain’s chief Brexit negotiator David Frost says the talks’ progress is blocked, and time is running out. Boris Johnson threatens to ban the EU fishermen’s access to the UK waters for eight years if his fishing quotas proposal for three years is not accepted. Emmanuel Macron argues that this will not provide medium- term confidence for the French national fleet. And fishing isn’t the only sticking point between London and Brussels.

There is nothing more permanent than temporary. The UK criticizes the 750 billion euro recovery fund, claiming if its funds were directed to the development of electric vehicles, it would completely distort the level playing field. Some Senate Republicans insisted on language ensuring that expiring Federal Reserve lending programs cannot be revived, which sets back the agreement on a $900 billion coronavirus economic relief bill. The matters of Brexit and US fiscal stimulus haven’t yet been settled. The rallies of the [S&P 500][2], the pound, and the [EURUSD][1] look surprising, providing some reasons to exit the longs on these assets. Especially on the Quadruple Witching day.

After all, even if the US Congress approves of the new financial aid package, and the vaccination progresses, the US GDP could quickly rebound. If so, investors could recall the dollar smile theory. At the last stage, the dollar should be rising, as the US economy is recovering faster than others.

Dynamics of USD index

Source : Bloomberg

[EURUSD][1] trading plan today

BofA Merrill Lynch notes the “sell the dollar” strategy is now the most popular in the Forex market after “buy shares.” Short positions in the dollar hit the highest level for more than two years; why not exit some greenback sell trades? Yes, the [EURUSD][1] has reached the [target at 1.224][3], set a week ago. Yes, the uptrend is strong, and I still believe that the euro will set at $1.25 in 2021. But it is hazardous to buy out the highs now. I’d rather buy on 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.

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