US dollar price forecast 8 January 2021

2021-01-08

Dollar is clutching at straws. Forecast as of 08.01.2021Dmitri Demidenko

Although the US stock market rose, the euro rolled down. Will the correction be deep? Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Weekly US dollar fundamental forecast

The Fed’s hawkish stance and the surge of the Treasury yield made [EURUSD][1] bulls nervous. Speculators have been building up US dollar shorts for the 40th week in a row, and the bullish factors for the greenback encourage the sellers to exit trades. Furthermore, Bloomberg experts expect a weak growth of the US nonfarm payrolls by 50,000. A quarter of the analysts polled suggest the indicator should enter a negative area.

A ‘blue wave’ allowed the [S&P 500][2] to hit new all-time highs and supported the Treasury yield growth. The rates on 10-year Treasuries have reached 1.1% for the first time since February, have featured the best four-day rally since the presidential election. The yield is growing too fast. On the one hand, it makes the US assets more appealing; on the other hand, it sets back carry traders and emerging markets’ currencies. According to Reuters experts, the EM currencies should rally in 2021. 47 out of 57 analysts expect the EM currencies to perform better than the advanced economies’ currencies.

Dynamics of US Treasury yield

Source : Wall Street Journal

Forecasts for US dollar and other currencies

Source : Reuters

35 out of 63 economists, which about 55%, predict the dollar downtrend should continue for more than a year. The median forecast for the [EURUSD][1] is 1.25 at the end of 2021.

The greenback is supported by the Treasury yield growth, which resulted from the growing chance of an extra fiscal stimulus provided by Joe Biden’s administration. The stimulus will increase the volume of bonds issue and lead to the capital outflow from the secondary market to the initial one. The US dollar grew amid the hawkish tone of the Fed’s officials. Richmond Fed President Thomas Barkin says the Treasury yield increase indicates that investors expect the Fed to hike the interest rates. Philadelphia Fed President Patrick Harker says the Fed may begin paring bond purchases in late 2021.

I don’t think the [EURUSD][1] bears should expect the US bond market rates to continue the rally. History hasn’t proven that an increase in bond issue volumes leads to a rise in yields. In contrast, the US debt to GDP ratio has hit the level that was last since during the Second World War, and rates are at near-record lows. The US government and the Fed remember very well that the debt must be paid, and the lower the yield, the cheaper it will cost to service them.

Weekly[EURUSD][1] trading plan

Therefore, I do not think that [EURUSD][1] bears will develop a deep correction unless there are new drivers. If the US jobs report for December is weak, the euro-dollar will go down to 1.218 or 1.2145. However, it is likely to encourage the buyers to buy at a better price, as the target at 1.25 is still relevant.

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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