US dollar price forecast 16 March 2021

2021-03-16

Dollar is calm before the storm. Forecast as of 16.03.2021Dmitri Demidenko

The [EURUSD][1] is trading in a narrow trading range ahead of one of the most important Fed meetings. It is natural, and investors do not want to risk. Traders are waiting for Jerome Powell’s speech to get clues on the Fed’s future policy. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

Markets worry because of the Fed’s patience. The Treasury yield is rallying up, reminding the taper tantrum of 2013. Derivatives signal the interest rates should be up in the first quarter. However, 75% of Bloomberg experts believe that the FOMC will not change its forecasts for the federal funds rate, suggesting that it will rise no earlier than the beginning of 2024. There will be a battle between investors and Fed, and the current [EURUSD][1] consolidation gives rise to associations with the calm before the storm.

It seems that the FOMC March meeting is the one the Fed would like to avoid. Much has changed since December when the Fed released its latest forecasts. Congress added about $ 3 trillion in fiscal stimulus, which, along with rapid vaccinations in the US, increases the expected economic growth. According to Bloomberg experts, the Fed will revise up its forecast for the US GDP for 2021 from 4.2% to 5.8%, although it will remain very conservative. The OECD expects to see the US GDP at 6.5%, while Goldman Sash even suggests 7.7%.

The increased growth expectations suggest a soon monetary normalization. However, according to Powell, the Fed doesn’t want to repeat the error made in 2013, when an early end of the QE resulted in the taper tantrum. Nevertheless, the current structure of the debt and derivatives markets suggests that investors, even without the Fed, know what to do. Options signal 10-year Treasury yields will rise to 1.85% by the end of 2021, and CME futures signal a 75% probability of a federal funds rate hike in December 2022. In the latest FOMC forecast, only one member of the Open Market Committee believed that this would happen next year, five expected monetary tightening in 2023; the rest said the federal funds rate wouldn’t be up until 2024.

December FOMC forecasts for federal funds rate

Source : Bloomberg

Meanwhile, Jerome Powell and his fellow central-bankers repeat the mantra that the Treasury yield rally should not raise concerns as it signals the expectations of the US economy’s explosive growth. But what if the 10-year yield exceeds 2%? Based on the PMI data, the US yield could grow above 3%.

Dynamics of global PMI and Treasury yields

Source : Nordea Markets

Of course, the Fed will stop being patient sooner or later. Due to the pandemic and recession, government loans in the world have increased by 60% over the past 12 months, which is twice as much as during the previous crisis. The US national debt has exceeded 100% of GDP, and the growth in the servicing cost will slow down the economy. And then there’s Joe Biden, who is planning the first massive tax hike since 1993.

Weekly [EURUSD][1] trading plan

The Treasury yield growth and tightening of the fiscal policy are powerful drivers for the [S&P 500][2] correction. Jerome Powell should be cautious not to trigger a sell-off wave in mid-March. Meanwhile, investors are waiting for the Fed meeting to revise investment ideas, and the [EURUSD][1] is consolidating in the range of 1.188-1.199. I do not recommend entering any trades.

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.

Rate this article:

( {{count}} {{title}} )