US dollar price forecast 26 February 2021

2021-02-26

Dollar tested Fed. Forecast as of 26.02.2021Dmitri Demidenko

Traders using fundamental analysis should have been satisfied. Strong euro-area domestic data resulted in the euro growth; strong US economic data supported the dollar. However, the market drivers are far more complex. Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Weekly US dollar fundamental forecast

A basic rule to trade in the financial markets suggests investors should not go against the Fed. But sometimes people want to play against the rules, especially since it can yield a significant profit. This is what George Soros did in the 1990s, betting against the Bank of England and making his billion dollars on it. History knows many other examples. Therefore, the best daily growth in Treasury yields is not surprising; the market is likely to test the Fed’s strength.

The Fed presidents agreed with Jerome Powell’s patience in making any adjustments to monetary policy. Atlanta’s Fed president, Raphael Bostic, is not concerned about a rise in yields, suggesting the Fed should not respond to it. Some other Fed leaders, New York’s John Williams and Kansas City’s Esther George, believe that the Treasury yield surge likely reflects growing optimism in the strength of the recovery. The US bond yields accelerated after jobless claims slumped and durable goods orders rose at the fastest pace since summer.

Dynamics of US government bond yields

Source : Bloomberg.

The Treasuries sell-offs press down the US stock market. It’s one thing to buy equity securities when rates are low and another thing when the rates are sharply increasing. The stocks (especially tech stocks) look overvalued according to the fundamental gauge, and investors look for alternatives. The tech-heavy [Nasdaq Composite][2] index dropped by 3%, which signals a decline in the global risk appetite. That is why the US dollar strengthened.

Thus, investors seem to be testing the Fed’s persistance, carefully observing how Jerome Powell will behave under pressure. Usually, a rapid rally in Treasury yields indicates a rapid rise in inflation and forces the central bank to normalize monetary policy. I would suggest that the Fed will withstand the pressure. For the first time since 2008, there has appeared a signal in the bond market known as an inversion of the break-even curve. The difference between the yields on ordinary Treasuries and the yields on inflation-protected Treasuries (TIPS) is more significant for the short-term papers than for the long-term ones. It signals that the inflation rise will be temporary. That is the position the Fed sticks to.

Besides, there are more growth drivers for the euro, both global and domestic. The euro-area economic confidence index has been up to almost an annual high. Furthermore, the international trader is recovering faster than after the previous crisis. Therefore, I suggest it is still relevant to buy the [EURUSD][1].

Recovery of international trade

Source : Wall Street Journal

Weekly [EURUSD][1] trading plan

The [EURUSD][1] bulls failed to consolidate above the upper border of the consolidation range of 1.2-1.22, which signals their weakness and increases the chance of further correction down if the price breaks out the support at 1.214. Nonetheless, if you are going to enter short-term sell trades, be careful, set short targets, and be prepared to exit sales at any moment.

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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