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US dollar price forecast 24 February 2021

2021-02-24

2021-02-24

Dollar has to unlearn. Forecast as of 24.02.2021Dmitri Demidenko

The Fed is willing to be patient and ignore a surge in the US inflation. If so, the [EURUSD][1] trend should not soon reverse. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

If anyone worried that the Fed would be frightened by the rise in inflation expectations and would signal to taper the QE, Jerome Powell’s speech to Congress eliminated any worries. The US economy is far from the Fed’s targets for employment and inflation, and it will likely take some time to make significant progress in this direction. Therefore, the Federal Reserve won’t change the ultra-low federal funds rate or the asset purchases at a monthly pace of $120 billion. If so, the dollar should weaken.

In theory, the huge fiscal and monetary incentives should result in the growth of the money supply and inflation. According to Jerome Powell, economists need to unlearn what they studied at the universities a long time ago when M2 and monetary aggregates seemed to relate to economic growth and inflation. In recent decades, there has been a tendency for a significant slowdown in consumer price growth, and the Fed Chair does not understand how a surge in fiscal and monetary support that does not last for a long time can change this trend. Powell does not believe US inflation will reach alarming levels or will continue to rise.

Such a tone means the Fed is willing to be patient. The Central Bank is ready to allow the economy to overheat, just not to repeat the past mistakes when it ended QE and hiked the interest rates too early. If so, the US dollar will be under pressure, which gives hope for the [EURUSD][1] uptrend recovery. After all, the real rates in Europe are growing approximately as fast as in the United States, which makes the euro-area assets more promising, European stocks are undervalued compared to US peers, and the share of the euro in the central banks’ FX reserves must be increasing.

Dynamics of real swap rates

Source : Nordea Markets

The greenback doesn’t strengthen although the vaccination campaign is progressing in the USA (65 million Americans were inoculated, which is 20% of the population), the reports on retail sales and PMI are positive. Investors understand that the US GDP rebound is good for the entire world economy, including the export-led euro area. When the EU countries start lifting lockdowns, the euro-area GDP should start growing rapidly, as it did last year, pushing the [EURUSD][1] up towards 1.25.

I do not think the euro bears can count on the [S&P 500][2] correction, followed by a decline in the global risk appetite. Joe Biden’s $1.9 billion is just the beginning. The new US administration intends to increase the fiscal stimulus to $3 trillion or $4 trillion, equivalent to 14-19% of GDP. Moreover, investments in infrastructure will be a priority in the second package.

**Weekly[EURUSD][1] trading plan **

Therefore, even if the [EURUSD][1] continues consolidation in the range of 1.2-1.22, as I suggested in [one of the earlier articles][3], it will be more likely to break the trading channel upside than downside. It is still relevant to buy out the euro-dollar on the price fall.

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/euro-benefits-from-carry-trades-forecast-as-of-19022021/