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US dollar price forecast 17 February 2021

2021-02-17

2021-02-17

Will red line stop dollar? Forecast as of 17.02.2021Dmitri Demidenko

The euphoria in the US stock market is dangerous for the [EURUSD][1] bulls. The fundamental estimates of the stock indexes suggest they are overvalued. How will the euro react? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

No asset can be rising indefinitely. This applies to both the euro, which was substantially growing in the second week of February, and the [S&P 500][2], which has been hitting all-time highs. Investors ignored too high fundamental estimates of the stock index, explaining this with a unique mode of historically low Treasury yields. However, the rally of the US 10-year bond yield, which is higher than the pre-pandemic levels, made traders doubt the US stock market’s ability to continue the rally.

When investors buy stocks and sell bonds, which translates into higher yields, they believe in the global GDP rebound. For example, 91% of the 225 $ 645 billion asset managers in a BofA Merrill Lynch survey indicated they expect a stronger economy. They reduced the share of cash in portfolios to 3.8%, the lowest level since March 2013. Risk appetite is exceptionally high, and the only reason for the bearish sentiment is the lack of reasons for the bearish sentiment. The [S&P 500][2] traded recently 22.52 times its projected earnings over the next 12 months, above a five-year ****average of 17.96. Under such circumstances, the emergence of doubt can result in a correction down. And the rally in Treasury yields gave rise to such doubts.

The US bond market rates are growing even though the US economic data are not positive enough. Traders sell Treasuries on the news about the rise of the Germany ZEW economic sentiment or higher corporate earnings forecasts in the euro-area markets. The US Treasury yields growth the [S&P 500][2] is overvalued, which could start a correction, worsen the global risk appetite and send the [EURUSD][1] down.

Dynamics of P/E and the ratio of the US bonds

Source: Nordea Markets.

The EURUSD fell amid the bulls’ inability to hold level 1.215. The euro has many vulnerabilities, including slow vaccination and investors’ desire to use the euro as a funding currency in carry trades. According to Bloomberg estimates, a portfolio of 10 emerging markets’ currencies, funded in euros, would have yielded a 2.2% profit, and a 1.1% profit if funded in the US dollars. Furthermore, there is a rally in Treasury yields, which reduces the greenback’s appeal as a funding currency in trading the difference in interest rates.

Weekly [EURUSD][1] trading plan

I do not think the [EURUSD][1] bulls faced a disaster. In the first half of 2020, the [S&P 500][2] was ahead of the economy. Likewise, the Treasury yields are rising now. The greenback’s problem is that the Fed won’t react to the yield rally. The central bank won’t take away the punch bowl just as the party gets going. Therefore, it is still relevant to buy the euro-dollar on the corrections to1.2045 or 1.985-1.2, or if the price is again above the resistance at 1.215. Level 1.208 is still a kind of the red line, indicating the market sentiment.

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