US dollar price forecast 21 December 2020

2020-12-21

Dollar plays Mafia. EURUSD forecast 21.12.2020Dmitri Demidenko

At a time when liquidity in financial markets is falling on the eve of Christmas and uncertainty is growing, investors’ interest in the US currency is returning. Let’s talk about it and create a trading plan for [EURUSD][1].

Monthly US dollar fundamental forecast

Uncertainty is an integral part of our life. Financial markets cannot exist without it. This is why investors return to the US dollar from time to time. Fish stuck in the nets of Brexit - let’s sell [GBPUSD][2]; a new strain of COVID-19 is discovered in Britain and it spreads 70% faster than the previous one - let’s buy the greenback; it’s hard to tell how Congress will vote on the fiscal stimulus issue - time to return to the dollar. Uncertainty is not the only factor supporting the dollar. It is likely that the markets oversold it.

Dynamics of the USD index

Source: Bloomberg.

Although congressional leaders managed to negotiate about $900 billion in fiscal stimulus, the second-largest aid package in US history after the $2.2 trillion one in March, how the Senate and the House of Representatives will vote on December 21 is yet unknown. The stumbling block is the Fed’s emergency lending programs. Democrats accuse Republicans of creating obstacles to the fiscal deal, and a potential clash could lead to the project being rejected.

The new strain of COVID-19 discovered in Britain is even greater uncertainty, forcing London to impose additional restrictions, and more than ten European countries to stop letting in tourists from Britain. While epidemiologists say that there is no connection between it and increased mortality rates and that vaccines may still work in the face of a new threat, but what if this is not the case? The entire plan to defeat the pandemic and rapidly restore global GDP in 2021 could go down the drain.

The uncertainty surrounding Brexit hasn’t gone away at all. Boris Johnson needs clarification on the new EU fisheries proposal, he believes that the discussed financial aid package is unbalanced and will allow the EU to issue more subsidies than Britain, and Minister for the Cabinet Office Michael Gove argues that London and Brussels will be forced to conclude not one big deal but a few small agreements. The clock is ticking, time is running out, the pound is falling, dragging [EURUSD][1] down with it.

Investors are not sure whether the Fed will begin to tighten monetary policy in 2021. Yes, the FOMC forecasts suggest that rates are unlikely to rise before 2024, but there is also an emergency purchase program. Will the rise of inflation expectations, inspired by the current oil price rally, be the reason for the reduction in the scale of QE?

Dynamics of oil and inflation expectations

Source: Nordea Markets.

Dallas Fed President Robert Kaplan would prefer to start cutting down on bond purchases if GDP grows rapidly. Long QE creates problems, he says. It distorts financial markets and creates conditions for imbalances that will be difficult to manage.

Monthly [EURUSD][3] trading plan

As expected, the [EURUSD][1] pair couldn’t hold above the 1.224-1.2245 level, while increased uncertainty increases the likelihood of consolidation in the range of 1.196-1.226. That is unless the vote in the US Congress goes off perfectly and the Brexit problems are resolved successfully in the last minute.

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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