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US dollar price forecast 18 February 2021

2021-02-18

2021-02-18

How to manage the dollar smile? Forecast as of 18.02.2021Dmitri Demidenko

Europe faces a recession while the USA creates new jobs and companies. The US GDP could be up 9.5%, while the euro area could slide into a double-dip recession. Naturally, the [EURUSD][1] is declining. How long will the correction last? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

The market economy is based on immunity – its ability to independently cope with the emerging troubles while the administrative economy is similar to chemotherapy. There is a chance of a cure for the disease, but it is unknown how other organs will react to the medicine. The US approach to managing the pandemic is tighter but also more flexible than that of the euro area. The Eu governments prohibit layoffs and bankruptcy, creating the possibility of zombie companies emerging. The US helps those who can really do it to survive. Different strategies increase the divergence in the economic growth, which still encourages the [EURUSD][1] bears.

The euro-area economies are still locked down while the US is creating new companies and new jobs. These circumstances revive the dollar smile theory. The dollar smile theory suggests the greenback’s strengthening in response to the recession due to investors’ demand for safe-havens in the first stage, the dollar weakening in the second stage amid the Fed’s aggressive monetary expansion, and, finally, the USD growth in the third stage due to the different recovery rates of the US GDP and its global peers. Looking at the European lockdown, the EU administrative methods of the pandemic management and the US positive economic data, it seems that the dollar is entering the third stage.

U.S. retail sales surged in January by the most in seven months (+5.3% Y-o-Y) amid the massive fiscal stimulus under Donald Trump. Joe Biden is willing to increase the financial assistance to the economy, which suggests the US GDP should rebound already in the first quarter. Atlanta Fed GDPNow model signals that the US GDP will expand by 9.5%, which is significantly higher than its forecast of + 4.5% a week ago.

Dynamics of US retail sales

Source : Bloomberg

The economy is growing, inflationary expectations are growing, and Treasury yields are growing. All the necessary conditions are emerging for the normalization of the Fed’s monetary policy. The first step should be to cut the asset purchase program by $ 120 billion a month, the hints at which strengthened the greenback in January. Jerome Powell discouraged the dollar bulls by stating that the Fed is unwilling to repeat the errors that resulted in the taper tantrum in 2013. However, the question of a pullback on the US QE is still open. In the minutes of the FOMC January meeting, officials noted that it would take some time before the QE reduction conditions are met.

It would seem that the growing popularity of the dollar smile theory should break the [EURUSD][1] uptrend or at least result in a deep correction down. The matter is that this theory is not the only one. China, the USA, and the euro area are all in the same boat because of the pandemic, and the success of the US economy could ultimately press the greenback down.

Weekly [EURUSD][1] trading plan

I believe both theories are viable. The latter will work out if there are signs of the euro-area economic recovery. These signs can well emerge from Germany’s and euro-area PMI data for February. If the euro- area economic data change positively, it will be relevant to buy the [EURUSD][1] on the breakouts of the resistances at 1.2065, 1.2085 and 1.2095.

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