Euro price forecast 27 January 2021

2021-01-27

Dollar will spoil the party. Forecast for 27.01.2021Dmitri Demidenko

The FOMC’s first meeting in 2021 is an important event for financial markets. However, the Fed’s meeting will hardly change investors’ sentiment. Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Fundamental US dollar forecast for today

Jerome Powell is trying to convince the financial markets that the Fed will not take away the punch bowl just when the party gets going. However, different vaccination paces and the growth-gap between the US and euro-area economies suggest that the [EURUSD][1] bulls should not expect the euro rally to be as fast as it was in November-December. The IMF expects the US and China’s economies to exceed the forecasts made for 2022 before the pandemic by 1.5% by the end of next year. Some European economies will only be able to recover to pre-crisis levels in 2023.

In 1955, William McChesney Martin, then chairman of the US Federal Reserve, noted that the central bank’s attempt to raise interest rates too early to slow down inflation looks like taking away the punch bowl just when the party gets going. Jerome Powell does not want to repeat the mistakes of the former Fed’s chairs. For example, Ben Bernanke crashed financial markets in 2013, saying that it was the right time to start tapering the bond purchases. In early January, several FOMC officials talked about pulling back on the asset purchase program, which supported the US dollar. Powell aims now to dissuade investors from this idea.

However, 37% of Bloomberg experts believe that the Fed should start winding down the QE as early as 2021. Such expectations are one of the key drivers of the greenback strengthening.

Forecasts for the time of US QE slowing

Source : Bloomberg

Furthermore, the US dollar has more benefits. They are a potential escalation of the US-China trade battle, divergence in the paces of vaccination and economic recovery in the US and the euro area. Although the upward revising of the forecasts for the global GDP in 2020 from -4.4% to -3.5% and in 2021 from +5.2% to 5.5% by the IMF is good news for the [EURUSD][1] bulls, it is necessary to understand what will drive the global economy. The leaders should be the USA and China, while the euro-area economies should be lagging behind.

GDP growth in 2021 compared to pre-crisis levels

Source : Bloomberg

I do not believe the above factors are the ultimate benefits for the greenback. The US dollar should benefit from the US-China battle escalation, but the greenback could weaken if the global GDP rebounds because of its safe-haven status. Such a scenario is more likely to work out in the medium term. In the short run, the [EURUSD][1] trend depends on the vaccination speed.

With this regard, the situation suggests the euro should be corrected down. Pfizer said it is ready to ship 200 million doses to the US by the end of May, two months earlier than initially estimated. On the contrary, the vaccine’s provision to the European Union is being delayed due to problems with the manufacturer’s plant in Belgium. AstraZeneca said it would ship substantially fewer doses to Europe than it had promised.

[EURUSD][1] trading plan for today

I believe Jerome Powell’s dovish stance could push the [EURUSD][1] up above the bottom of figure 22. However, investors should soon realize that there won’t be such a rally as it was in November-December and start selling the euro. It will be relevant to enter short-term sell trades if the price fails to test the resistances at 1.221 and 1.2245.

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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