US dollar price forecast 4 March 2021

2021-03-04

Dollar teases Fed. Forecast as of 04.03.2021Dmitri Demidenko

The bond market and the US dollar continue to test the Fed’s patience. The rule ‘do not go against the Fed’ is still relevant, but the market has become stronger. How will the confrontation end? Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Weekly US dollar fundamental forecast

The turmoil in the stock market caused by the US Treasury yield growth is something that we will have to get used to. The problem is that the current generation of investors is simply not ready for shocks. They have never seen a real bear market in the [S&P 500][2]. That is why the Treasury yield rally shakes the stock indexes.

The US equity market, like the [EURUSD][1], has been down. The US PMI has reached the highest level since 2016, according to Markit. The ISM services PMI has been growing for nine consecutive months. According to the Beige Book, most businesses in the USA remain optimistic regarding the next six to 12 months. Furthermore, the ADP private-sector employment has been increasing during the last nine months out of ten. The above-listed factors have pushed the Treasury yields up, sending down the US stock indexes and supporting the greenback. Yes, there was a slowdown in the ISM PMI, but the decline is temporary due to bad weather. This is proven by the rise in the ISM index of order backlogs to a six-month high, while the export demand was the strongest since June.

According to Bloomberg, the primary driver of the Treasury yield rally is the confidence in the US economic rebound, while the Fed’s monetary policy and the increase in Treasury issuance are less significant factors.

Dynamics of drivers of Treasury yield change

Source : Bloomberg

Atlanta Fed’s leading indicator signals that the US GDP will expand by 10% in the first quarter, encouraging investors to sell the US bonds. The market seems to continue testing the Fed’s persistence. Yes, the principle ‘don’t fight against the Fed’ is still valid, but the markets have become stronger due to massive monetary stimulus. By the end of 2019, the assets of funds around the world were $ 89 trillion, which exceeds both the balance sheets of the leading central banks ($ 25 trillion) and the size of the global economy.

Dynamics of world leading central banks’ balance sheets

Source : Reuters

Therefore, traders need to get used to regular surges in Treasury yields that overvalue stocks (primarily tech stocks) and lead to pullbacks in stock indexes. According to FactSet, the [S&P 500][2] P/E is 22, close to its highest value in 20 years. For comparison, in December 2009, 6 months after the recession, it was 14.

Weekly [EURUSD][1] trading plan

The FOMC officials seem to be unwilling to clamp down on the US bonds sales. Federal Reserve Bank of Chicago President Charles Evans joined with his colleagues, saying he was unworried about the Treasury yield rally. If Jerome Powell says the same, and the US jobs report for February is strong, the bond rates rally will continue. If so, the [EURUSD][1] could go down below 1.2. I hope the Fed’s Chair will express concerns about the negative impact of Treasury yield growth on the US financial conditions, which will allow the euro to go back above $1.2.

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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