US dollar price forecast 12 February 2021

2021-02-12

Dollar: Time matters. Forecast as of 12.02.2021Dmitri Demidenko

The Fed’s policy remains unchanged over a long time, making investors revise the former trading ideas, suggesting the [EURUSD][1] uptrend recovery. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

Experienced traders know that the time of the investment is often more important than the trade direction. In late 2020, investors were confident that the [EURUSD][1] would probably reach level 1.25 in the first quarter. In early January, Reuters experts predicted 0.6% GDP growth in the eurozone during the first three months of the year. In addition to the vaccination progress and high risk appetite, the euro- area economic recovery should have encouraged the euro bulls to go ahead. However, economists revised the projections down due to lockdowns and slow vaccination. Now, the euro-area GDP is expected to contract by 0.8%. Traders are disappointed. If the euro fails to hit a level of $1.26 in the second quarter, it could fall to $1.15.

If we solve the time puzzle, we can learn a lot. And we could achieve a lot. Remarkably, the Fed could give investors a clue. The former US central bankers didn’t want to provide accurate signals about the Fed’s future policy as this would either encourage excessive complacency in the market or discourage investors. Or both at the same time. However, in the last decade, the US central bankers are prone to demonstrating how the Fed will react to incoming economic data, which is supposed to prevent the market from shocks. And here’s a new feature. The regulator focuses on time. The Fed does not intend to raise the federal fund rate earlier than 2023; it will not pull back on the QE until the end of 2021. It does not matter what the direction of economic indicators will be. The main factor is time!

If the Fed’s attitude change, investors should also change their views. Although the US stock indexes look overbought, in terms of P/E ratio, they do not cease breaking through the all-time highs. And the trading volumes on the US stock exchanges are close to their ten-year high, which took place during the market turmoil in March.

Dynamics of trading volume in US stock exchanges

Source : Bloomberg

What’s the matter? Have Investors lost their sense of Fear amid the huge flows of cheap liquidity? This is certainly true, but they must believe that the Fed will keep rates low for a very long time. This means that fundamental assessments need to be revised. The [S&P 500][2] rally is far from being exhausted!

What is valid for the equity market is right for Forex. The dollar smile theory should have worked out. The divergence in the economic expansion should have supported the dollar bulls. Wall Street Journal experts revised the forecasts for US GDP for 2021 to 4.9%, up from 4.3% in January. On the contrary, the European Commission lowers its projections for the euro-area economic growth to 3.9%. Nonetheless, the [EURUSD][1] is steadily rising! Is it a paradox?

European Commission’s projections for euro-area GDPs

Source : Financial Times

Weekly [EURUSD][1] trading plan

The real reason is the Fed’s focus on time. The US low interest rates support not only the US economy but also global growth. The US GDP rise is a sign of the global GDP rebound. Therefore, it is relevant to buy the [EURUSD][1] on the breakout of the resistance 1.215 or on the correction towards 1.208.

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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