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US dollar price forecast 12 January 2021

2021-01-12

2021-01-12

Dollar follows Treasuries. Forecast of 12.01.2021Dmitri Demidenko

Before you start rising, you need to get rid of everything, keeping you down, the ballast. The EURUSD correction has scared off some former bulls. What’s next? Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Weekly US dollar fundamental forecast

The dollar has become oversold, so, naturally, it should rise for some time. The rally of the Treasury yields encouraged speculators to exit short trades on the greenback, which have been expanding over the past few weeks and reached multi-year highs. Emerging markets currencies and the euro have suffered the most from the USD rebound. The [EURUSD][1] correction has questioned the former consensus forecast and even turned yesterday’s bulls into bears.

Morgan Stanley, which suggested at the end of 2020 that the US dollar should be 10% down over the next twelve months, now says the greenback has reached the bottom. New fiscal stimulus and the Fed’s discussion of monetary normalization, which could start already in June, will support the Treasury yield growth. I must admit the arguments are quite convincing: in my [December euro price prediction][2], I noted that the [EURUSD][1] uptrend could turn down amid the talks about the federal funds rate hike, but I expected it to happen in late 2021. I still keep my point of view, the current euro’s drawdown is a normal correction, the pair should exceed the January highs before the uptrend reverses.

After Joe Biden promised trillions of dollars of additional assistance to the economy, the Treasury yields are rallying up. The rates on 10-year Treasuries have reached 1.158%, the highest value since February. Besides, Citi anticipates that the new fiscal stimulus will be $600 billion, Goldman Sachs expects $750 billion, and BofA Merrill Lynch - $1 trillion.

Projections for new stimulus package

Source : Bloomberg

The situation in the US bond market doesn’t yet concern the Fed. Conversely, Atlanta Fed President Raphael Bostic said that if the US economy recovers quickly, the central bank will begin to roll back QE as early as 2021. Dallas Federal Reserve President Robert Kaplan says he expects the US economic growth to be strong enough to allow the Fed to consider pulling back on the asset purchase program. The money markets suggest the Fed should hike the interest rate twice by the end of 2023. Not long ago, there were doubts even about a single rate hike during the suggested period.

Weekly [EURUSD][1] trading plan

I think the Fed is not concerned about the rise of the Treasury nominal yield, as the real yield is still low. The 10-year yield should be up to 1.6-1.8% to scare the Fed and the markets, which is yet unlikely. On the contrary, the idea of Trump’s impeachment could delay Congress’s consideration of Joe Biden’s stimulus offer, discourage the bears on the US Treasuries, and suspend the [EURUSD][1] correction. To buy the euro- dollar, we need additional signals. The first buy signal will be sent when the euro sellers fail to draw the price below the support zone of $1.212-$1.2145. If the price goes below the support zone, we shall pick up the rebound and buy the euro at a low price around $1.208 and $1.204.

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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  1. my.liteforex.com/trading/chart?symbol=EURUSD&returnUrl=true
  2. www.liteforex.com/blog/analysts-opinions/two-scenarios-to-trade-the-euro-forecast-as-of-28122020/