US dollar price forecast 15 March 2021

2021-03-15

Dollar has a double bottom. Forecast as of 15.03.2021Dmitri Demidenko

It looks as if the divergence in the economic expansion, monetary policies, and the bond yields growth rates should have broken down the [EURUSD][1] uptrend. Is it really so? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

The market moves so unexpectedly that conspiracy theories appear very frequently. However, large traders cannot afford to act like the Reddit traders as they will instantly be charged with the manipulations and could be sent to prison. Cheating is investors’ minds. They are wishful thinking and act according to what they see on the surface, unable to look deeper.

Why is the dollar growing? I see at least three reasons. First, amid the US government’s massive fiscal stimulus and high vaccination rate, the US GDP could be up to 10% already in the first quarter while the euro- area is likely to slide down into a double-dip recession. Furthermore, Treasury yields are rising faster than their European peers. The Fed’s reluctance to worry about increasing debt market rates fuels the panic, leading to an increase in the currency-hedging costs, which historically supports the [EURUSD][1] bears.

Dynamics of [EURUSD][1] and hedging costs

Source : Nordea Markets

However, the US strong economy will provide benefits for export-led countries, including the euro-area, in the future. Thanks to massive financial aid, the US domestic demand is so high that the global economy faces a substantial shortage of products. The lengthening of the suppliers’ delivery time is a persuasive concern. The delivery time has increased in February to the second greatest value ever. If there is demand, there will be supply. Therefore, the euro-area economy will be catching up with the US in the second-fourth quarters amid the increase in exports.

The deficit of goods results in consumer prices’ growth. Investors are nervous, and the Fed’s passive attitude fuels the market turmoil, contributing to the Treasuries sell-offs and the correction of the US stock indexes. In fact, 2- and 5-year inflation expectations are growing faster than 10-year ones. That is, the Fed’s assumption that the inflation surge is temporary is correct. According to economists polled by Bloomberg, the FOMC will hike the interest rates in 2023 but is unlikely to signal this at the meeting on March 16-17.

Dynamics of inflation expectations

Source : Financial Times

The leading growth of the US bond yields over the euro-area peers is also a temporary situation. If the euro-area economy starts to show signs of recovery, the situation will change, and the ECB will not need to increase the asset purchases under the PEPP. Moreover, the lagging pace of the yield growth in the euro-area allows local stock indices to outpace their US peers. EuroStoxx 600 added 4.5% in March, [S&P 500][2] - 3.5% and [Nasdaq Composite][3] - only 1%. Investors are buying out the stocks of the companies, which were the outsiders in 2020. The structure of the euro-area stock market suggests it should rise.

Weekly [EURUSD][1] trading plan

By and large, the medium- and long-term [EURUSD][1] outlook is still bullish, although the US dollar could strengthen in the short term. Meanwhile, hold the shorts entered at level 1.199 and enter new sell trades when the price breaks out the supports at 1.191 and 1.188. However, if the euro goes up above $1.199 and $1.204, it will be relevant to open long positions.

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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