US dollar price forecast 5 January 2021

2021-01-05

Dollar tries to be the first to wake up. Forecast as of 05.01.2021Dmitri Demidenko

The market is gradually waking up after the holidays and remembers about politics and COVID-19. The December euphoria is fading away, and safe havens could rise up amid the change in investors’ sentiment. Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Quarterly US dollar fundamental forecast

The [EURUSD][1] bulls were trying to push the price up above 1.23 but faced a serious obstacle – a drop in the US stock indexes. In 2020, the USD index was 7% down amid an increase in the global risk appetite, hopes for the global economic recovery, and the Fed’s ultra-easy monetary policy. In early 2021, investors are not that confident in the former drivers. There is the second round of elections in Georgia; there are problems with vaccine production. Furthermore, investors have realized that the Fed is not the only one to affect forex rates. All these factors could make the greenback more appealing for traders. I don’t think the dollar’s growth will be continuous.

Dynamics of USD index

Source : Bloomberg

Rising chances of Democratic candidates to win two seats in the Senate ahead of the vote should have been a bullish factor for the [S&P 500][2]. A ‘blue wave’ will make additional fiscal stimulus more likely. In December, Joe Biden said that $ 900 billion was just the beginning; the economy needed more financial support. However, investors are concerned about potential tax increases and stricter tax rules. And the political uncertainty is still a problem. Furthermore, the forecasts for the US employment in December are rather gloomy (Wall Street Journal experts expect the indicator will turn down from +245,000 to 68,000). So, the drop of the US stock indexes seems natural.

Moreover, the number of hospitalizations in the United States is rising, and the European countries are tightening lockdowns. Yes, the optimism about vaccines pushed the manufacturing PMIs in the US and euro area up to the highest levels since September 2014 and May 2018, respectively. However, the services sector, which accounts for about 80% of the US and euro-area economies, is still pressed down. Investors understand that COVID-19 vaccines will provide results sometime later, and the present situation is still difficult. Furthermore, vaccine production and logistics problems are worsened by labor shortages. Many contract manufacturers are trying to fill roles that often require years of experience in pharmaceutical manufacturing or biotechnology-related degrees.

The economic recovery is set back, which could increase the demand for safe-haven assets. Investors doubt that the Fed’s ultra-easy monetary policy will provide as much support for the USD bears in 2021 as it did in 2020. According to Bloomberg research, more than 90% of central banks will hold interest rates at the current levels or even cut them.

Monetary policy of central banks in 2021

Source : Bloomberg

Quarterly [EURUSD][1] trading plan

Traders still focus on the Fed’s policy, and so, any achievements of the [EURUSD][1] bears should be temporary. Federal Reserve Bank of Chicago President Charles Evans said the U.S. central bank shouldn’t be shy about letting inflation run above 3%. Evans says he will consider the PCE rise as a temporary improvement resulted from the economic recovery after the pandemic. If other Fed’s governors share the same opinion, the central bank won’t hike the federal funds rate before 2024. It is still relevant to buy the euro on the corrections with the targets at $1.25-$1.27.

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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