US dollar price forecast 7 January 2021

2021-01-07

Dollar takes a clean pair of heels. Forecast as of 07.01.2021Dmitri Demidenko

As long as, with the joint efforts of the Fed and the Treasury, the Treasuries’ real yield remains low, the greenback sell-offs will continue. Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Quarterly US dollar fundamental forecast

The White House and Congress are united, and the US stock market is divided. That is the result of the Senate elections, following which Democrats have taken the two vacant seats. Now, with Vice President- elect Kamala Harris, the Democrats will control both the White House and Congress. A ‘blue wave’ suggests higher risks of additional fiscal stimulus, increased infrastructure spending, higher taxes, and stricter tax rules. The companies most suffered from the pandemic will be the primary beneficiaries. The high tech sector will be under pressure.

In 2020, the [S&P 500][2] was 18% up, and more than half of its gains resulted from the growth of high tech companies’ stocks. The [Nasdaq Composite][3] surged by 45% due to the high demand for Internet services because of the isolation. Tightening of tax rules under Joe Biden and the victory over the pandemic due to vaccines could radically change the market sentiment. In 2021, the high tech sector will hardly repeat its last-year success. Conversely, the problems in the high tech industry will set back the [S&P 500][2] growth.

US stock market reaction to elections in Georgia

Source : Wall Street Journal

If the old bets do not work, one needs to look for new investment options, also outside the USA. According to a December poll of BofA Merrill Lynch, the share of emerging markets’ stocks in asset managers’ portfolios has surged to the highest level since November 2021. Investors are also interested in euro-area securities. The capital outflow from the US to the euro area is one of the key growth drivers of the [EURUSD][1].

Some analysts suggest the levels of $1.2 or $1,25 be the limits, whose breakouts will result in the ECB’s concerns, followed by verbal interventions. However, the US dollar share in the total volume of Forex conversion operations significantly exceeds the share of the single European currency. As long as the Treasuries’ real yields are low, due to the Fed and the Treasury plan, it makes sense to sell the greenback. The minutes of the FOMC December meeting proves that the Fed won’t change its ultra-easy monetary policy until there is evidence of the steady progress towards the targets for inflation and employment. The central bank will continue buying assets at a monthly pace of $120 billion per month.

Will the central bankers reduce the QE volume? The market will give a clue when there is a need. The 10-year Treasury yield has been up above 1% for the first time since March 2020, and it is not a reason for any changes yet.

Dynamics of Fed’s interest rates and US bond market

Source : Bloomberg

Quarterly [EURUSD][1] trading plan

The Senate elections have lowered the uncertainty rather than increased it. The safe-havens could start growing in case of Joe Biden’s tough stance on China after the inauguration and substantial deterioration of the US economic data. The US dollar bulls could be encouraged by poor readings of nonfarm payrolls in December; however, it will hardly affect the general sentiment. The lower the [EURUSD][1] goes, the more buyers will appear, as investors expect the pair to reach the target at 1.25.

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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