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US dollar price forecast 15 January 2021

2021-01-15

2021-01-15

Will optimists favor dollar? Forecast as of 15.01.2021Dmitri Demidenko

The EURUSD drop could suggest that the former investment ideas may not be working. Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Quarterly US dollar fundamental forecast

May the US dollar become an attractive trading asset for optimists? According to the BofA Merrill Lynch poll, the greenback selling strategy was the second most popular among large investors after buying Hi-Tech stocks. Traders were selling off the US dollar as a safe haven amid the hopes for victory over the pandemic and the explosive growth of global GDP. In January, the situation has radically changed; the [S&P 500][2] rally doesn’t encourage the [EURUSD][1] bulls anymore. Why?

At the turn of 2020 and 2021, the correlation between US stocks and the USD index reached record highs. The US stock market is traditionally considered an indicator of global risk appetite, whose growth fuels the safe havens’ sell-offs, including the US dollar. Nonetheless, the massive fiscal stimulus expected under Joe Biden, the rebound of the US GDP (4.3% in 2021, according to the Wall Street Journal experts), and the greenback’s weakening should increase the foreign investors’ demand for the [S&P 500][2]. The capital inflow to the USA could strengthen the US dollar.

Dynamics of correlation between the[S&P 500][2] and USD

Source : Bloomberg

The growth of Treasury yields could turn the greenback from a funding currency into a risky asset. The dollar could be more appealing, especially compared to the yen and the euro, because the government bond yields in Japan and Germany are lower than their US peers. As a result, the dollar will be the favorite of optimists, betting on the global economic recovery in 2021.

I suggest some flaws in the above scenario, at least the current economic cycle stage. First, US equities look overvalued. The P/E ratio is 22.3, which is close to the all-time high of 24.4, recorded in March 2000. Yes, the fiscal stimulus of $1.9 trillion, promised by Joe Biden, easy monetary policy, and a potential rise of the US GDP will support the [S&P 500][2] bulls. However, investors should realize that everything has its price to pay. The price could include the growing taxes and the Treasury rates’ increase. As a result, the stock index could enter a long-term consolidation, and investors will search for other assets, more appealing than the US ones.

As for turning the greenback into a risky asset for carry trades, it is just an assumption without any reason. The growth of the Treasury yields must have been temporary. The US bond yields grew amid the increase of the papers’ supply and random comments of individual FOMC members about a pull back on QE. As expected, Jerome Powell ruined the hopes for a soon end QE. The Fed chairman noted that one of the central bank’s main mistakes after the 2007-2009 crisis was the too quick end of the ultra- soft monetary policy. It is not the time to talk about such things now; the right moment for a rate hike will not come soon.

**Quarterly[EURUSD][1] trading plan **

I don’t think it is the right time to abandon the greenback sales strategy amid the hopes for the global GDP rebound. The progress in the vaccination process will encourage the [EURUSD][1] bulls. I suggest buying the euro on the breakout of the resistance levels of $1.218 and $1.221 with an upside target at $1.25.

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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. my.liteforex.com/trading/chart?symbol=SPX&returnUrl=true