US dollar price forecast 20 January 2021

2021-01-20

Dollar listens to a teacher. Forecast as of 20.01.2021Dmitri Demidenko

Yellen’s speech in the US Congress met investors’ expectations. Stock bulls hope for an additional fiscal stimulus, and dollar bears believe the Treasury will not interfere. Where will the EURUSD go? Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Monthly US dollar fundamental forecast

When the verdict is not as strict as expected, you feel relief. Markets expected Janet Yellen to voice her adherence to a strong dollar policy. However, Yellen says the US doesn’t seek a weaker dollar to gain a competitive advantage. The [EURUSD][1] bears are discouraged as the Treasury secretary nominee says the Treasury should oppose attempts by other countries to manipulate currency values artificially. Will the ECB resort to verbal interventions after that?

Markets must have missed the rural teacher. This is how investors once called Janet Yellen for her ability to sort things out. Yellen satisfied the market with her speech in Congress. US stocks bulls hope for an additional fiscal stimulus of $1.9 trillion; US dollar bears believe that the Treasury won’t oppose the dollar weakening, suggesting the value of the US dollar should be determined by markets. At the same time, Yellen expressed her opposition to the euro weakening.

If the European Central Bank wants to press the [EURUSD][1] down, it should outplay the Fed. Yes, Christine Lagarde and her fellow central bankers were aggressive during the recession, but they were hardly more aggressive than the Fed. The Governing Council can’t affect foreign exchange rates now. The QE expansion won’t accelerate inflation and will face serious opposition from the hawks. The transition to a yield targeting policy will strengthen the euro by reducing the volume of asset purchases. By the way, according to the Bloomberg source familiar with the matter, the ECB is already doing something similar, narrowing the yield spreads between the euro-area government bonds. Christine Lagarde will not dare to speak about it aloud. There are the Japanese and Australian experiences with the subsequent growth of the yen and “Aussie” rates.

**Dynamics of bond yields and spread between euro-area bond

yields**

Source : Bloomberg

As long as most investors expect the dollar to weaken, the ECB’s failure to cut European bond yields suggests the euro should be growing in value. There is another problem. The [EURUSD][1] bulls bet on entirely different conditions.

Remember, the bullish euro projections for 2021 were based on the expected victory over the pandemic, exit from the lockdowns, and a rapid rebound of the euro-area economy. However, the vaccination progresses extremely slowly in Europe. About 4% of people received the vaccination in the US, while about 1% of people were inoculated in Germany.

Proportion of population inoculated

Source : Financial Times

Monthly [EURUSD][1] trading plan

The lockdown in the euro area could last longer than expected. If so, the euro-area GDP recovery won’t be that fast, and the [EURUSD][1] won’t reach level 1.25 soon. Of course, the rally might continue amid the euphoria about the pair consolidation above 1.208, followed by a successful test of the resistance at 1.215. However, I believe the euro- dollar should enter a short-term consolidation range of 1.208-1.238. If the bulls fail to break out the resistance at 1.215, the consolidation range will move lower.

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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