US dollar price forecast 16 February 2021

2021-02-16

Dollar won’t rock the boat. Forecast as of 16.02.2021Dmitri Demidenko

All countries should unite to win the fight against the pandemic. The world’s economies are in the same boat. Therefore, the US economy’s strength and the Treasury yield growth is good for other economies and a reason to buy the [EURUSD][1]. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

The pandemic makes people keep social distance but unites humanity. Together we are saddened by the increase in the number of deaths and rejoice at the success of vaccinations; we believe in a return to the old life and economic recovery. Any attempt to act for one’s own selfishness at somebody else’s expense turns into a complete failure, which Donald Trump’s defeat in the 2020 election proved. To overcome the COVID-19 pandemic, all countries should make an effort. If so, it is clear why the greenback doesn’t benefit from the US strong economic data to Treasury yield rally.

In January, the US debt market rates surged amid the ‘blue wave,’ and the US dollar strengthened. By mid-February, the U.S. Treasury 10-year yield has exceeded 1.25%, reaching the highest level since March 2020. Nonetheless, the greenback is going down. The reasons for the divergence in the bond and foreign exchange markets are the synchronous growth of bond rates in most of the world’s major economies. The decline in the number of new coronavirus cases, vaccinations, and oil price rallies have boosted the yields on the UK, German and other bonds.

Dynamics of bond yields

Source : Bloomberg

Investors believe in the victory over the pandemic, rapid rebound of the global GDP; they underestimate the chance of the monetary normalization by the world’s leading central banks, which fuels reflationary trades and supports the stock indexes’ rally. Furthermore, the divergence between the volatility of the US stock market and Forex is another bearish factor for the dollar.

Dynamics of volatility of Forex and stock market

Source : Wall Street Journal

Since a significant part of Forex transactions involves the greenback, we can say that Forex volatility is the dollar’s volatility. Besides, the end of the Donald Trump era, with its protectionism, trade wars, and verbal interventions, reduces uncertainty and safe-haven demand. The fact that the senators were unable to implement the idea of impeachment of the 45th US President, supported by the House of Representatives, pushed [EURUSD][1] up.

Euro is strengthening amid the unity of humanity, which creates the preconditions for the development of globalization, strongly opposed by Donald Trump. The increase in global trade is crucial for export-led economies and the equity market. According to a Financial Times poll, three times more investors think that US stock indices will outperform their European peers than vice versa. However, the [S&P 500][2] P/E is 23, and the P/E of MSCI Europe ex-UK is only 18. The underestimation may turn into a significant potential for profit growth, which will support the capital flow from the US markets to the European ones. If so, the euro should continue strengthening.

Weekly [EURUSD][1] trading plan

I do not think the [EURUSD][1] bulls will be discouraged by the US strong economic data or the Treasury yield growth. When the US, euro area, and other countries are in the same boat, the US economic expansion is seen as the common good. Therefore, it is relevant to buy the euro on the breakout of the resistance at $1.215, with the targets at $1.221 and $1.225.

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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