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US dollar price forecast 5 February 2021

2021-02-05

2021-02-05

Dollar wants to smile again. Forecast as of 05.02.2021Dmitri Demidenko

The leading vaccination rate in the USA compared to the euro area contributes to the expansion of divergence in economic growth and presses down the [EURUSD][1]. How long can this last? Let us discuss the Forex outlook and make up a trading plan.

Fundamental US dollar forecast for six months

The greenback seems to be smiling… The USD index has been growing for four weeks out of five this year, featuring the best trading performance since October in the first week of February. It reminds me of the dollar smile theory. According to the theory, the USD, first, strengthens amid the concerns about the recession risks; next, the dollar weakens amid the Fed’s aggressive monetary stimulus. Then, it strengthens again amid the USD GDP rate outpacing the global growth.

The dollar smile theory fits well with the concepts of the greenback transformation from a safe-haven asset into a risky currency and uneven economic growth. The USD is strengthening even amid the growth of the US stock indexes, which break through all-time highs. Joe Biden is ready to compromise with the Republicans and reduce the previously announced fiscal stimulus amount of $1.9 trillion, but hardly by much. Investors expect $1 trillion, and if the actual aid package is larger, the [S&P 500][2] will continue to rally. At the same time, the inverse correlation of stock indices with the US dollar is weakening, which, amid Treasury yields growth, suggests a change in the US dollar status. Why not use yesterday’s safe-haven asset as a risky currency in carry trades today?

Dynamics of dollar’s correlation with US stocks

Source : Bloomberg

Remarkably, Reuters experts still believe that the current USD rally is just a temporary surge. According to 63 out of 73 economists, the greenback in 3 months will remain at current levels or decrease. The consensus forecast assumes EURUSD will rise to 1.23 and 1.25 in 6 and 12 months. Many experts believe that the outperformance of the US economy will ultimately crash the dollar. The US and China will become the drivers of the global GDP growth, which will negatively affect safe- haven assets. In addition to the progress in the euro-area vaccination campaign, this will result in the [EURUSD][1] uptrend recovery. I share the same point of view.

The main risks for this scenario are in the uneven recovery of the world economy, which will allow the dollar smile theory to work out, and suggest an earlier than currently assumed Fed’s monetary normalization. If the dollar bulls use both of the greenback’s advantages, we can consider the [EURUSD][1] uptrend to be broken down.

The uneven distribution of vaccines suggests that the GDP will grow in some countries and contract in other ones. But still, I hope that the EU’s efforts to accelerate the vaccination process will be successful, and the euro area, together with China and the US, will become a driver of global economic growth. The Fed should consider the US economic situation and the global growth as well before deciding to wind down the QE.

[EURUSD][1] trading plan for six months

Therefore, I bet on a 70% chance that the [EURUSD][1] will reach level 1.25 in 2021. The euro medium-term outlook remains bullish. In the short run, it is still relevant to sell the pair and hold down the shorts entered at [level 1.208][3].

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
  3. www.liteforex.com/blog/analysts-opinions/the-fed-failed-mission-eurusd-forecast-as-of-28012021/