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US dollar price forecast 5 March 2021

2021-03-05

2021-03-05

Dollar conquered the market. Forecast as of 05.03.2021Dmitri Demidenko

The increasing popularity of US assets and a rise in the safe-have demand during the [S&P 500][1] correction allowed the EURUSD bears to drop the price below 1.2. What is next? Let us discuss the Forex outlook and make up a [EURUSD][2] trading plan.

Weekly US dollar fundamental forecast

If the current US President were Donald Trump, he would instantly call Jerome Powell an enemy of the United States. After the Fed Chair’s speech, the US stock indexes are rolling down. The Fed doesn’t seem to worry about a drop in the US stock index prices. Why should it? The US economic recovery is far from being complete, and the [S&P 500][1] has risen too high. The US stock benchmark is overvalued, so why shouldn’t it go down into a correction? The drawdown in the US stock market usually supports the [EURUSD][2] bears.

The unstable market has been shaken even stronger after Powell reiterated his intention to keep easy-money policies in place, saying the US is still a long way from the Fed’s goals of maximum employment and inflation averaging 2% over time. The Fed focuses not on a single component of financial conditions but on overall economic performance aggregated data. The Fed chairman would be worried (that is, he is not worried at the moment) about the turmoil in the financial markets or the constant tightening of financial conditions, which would create obstacles to the achievement of the Fed goals. Powell seems to want to sound dovish, but when investors are worried, they can’t interpret his hints correctly.

Treasury yields rose sharply, stocks hit another wave of sell-offs, and the US dollar strengthened. Obviously, the [EURUSD][2] bears are supported by both the growing attractiveness of US assets and the increased demand for safe-haven currencies during the [S&P 500][1] correction. Treasury yield spreads have grown over the past few weeks compared to their Japanese and European peers, which especially strongly affected the yen and the Swiss franc positions.

Changes in the bond yield spreads

Source : Financial Times

Investors believe that the 10-year Treasury yield could be up to 1.75% or even 2%, which encourages the USD bulls.

I believe the causes are more complex. Investors are frustrated that the global economic recovery is slow, varied, and uneven. The vaccination is relatively slow in the EU, where so far, only 8 doses have been given for every 100 people, compared with 24 in the US and 32 in Britain. Furthermore, the WHO has announced that in the euro-area, after six weeks of decline, the number of new COVID-19 cases has begun to rise again. That is why the markets doubt that the global economy will recover soon. The situation is fueled by the greenback strengthening, which tightens financial conditions in emerging markets, as they are heavily dependent on dollar funding.

The USA looks like an island of stability in the global ocean of turmoil. The US GDP could expand by 10% in the first quarter, and the Treasury yield growth signals the US economy’s strength.

Weekly [EURUSD][2] trading plan

The [EURUSD][2] won’t go up until there are any signs that the euro-area economic and epidemiological conditions are improving. As I expected, Jerome Powell’s speech sent the euro-dollar down below 1.2. If the price breaks out the supports at 1.195 and 1.1935, the euro could drop to $1.185-$1.188.

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=SPX&returnUrl=true
  2. my.liteforex.com/trading/chart?symbol=EURUSD&returnUrl=true