US dollar price forecast 17 March 2021

2021-03-17

Dollar feels good. Forecast of 17.03.2021Dmitri Demidenko

Things that scare the entire world do not worry the Federal Reserve. The Treasury yield growth reflects the strength of the US economy. Will the US central bank try to stop this? Let us discuss the Forex outlook and make up a [EURUSD][1] trading plan.

Weekly US dollar fundamental forecast

Everything changes. For the first time over the past twelve months, investors do not consider the pandemic a major driver of pricing in financial markets. The financial managers who manage almost $600 billion, polled by BofA Merrill Lynch, say that the major risk factors are inflation and Treasury yields’ uncontrolled growth. How will the Fed manage the excessive rise of the US bond market rates, and will it do this at all?

The FOMC’s December forecasts suggested that US GDP would expand by 4.2% in 2021, inflation would rise to 1.8%, and unemployment would fall to 5%. Given the rapid vaccinations, massive fiscal stimulus, and strong domestic data, projections should be revised up. According to Bloomberg experts, the central bank will increase its growth forecasts. And the increase should be quite significant. In particular, economists expect that the estimates for GDP will be up to almost 6%.

Median estimate of FOMC December forecasts

Source : Bloomberg

If the Fed upgrades the forecasts, will it stick to its former projections for the federal funds rate? Only one FOMC member in December saw the rate hike in 2022, five suggested it be up in 2023, the rest - in 2024. In fact, there is definitely a point. The most serious risk of the March meeting will be the shift in the timing of the monetary restriction start from 2024 to 2023. In this situation, there will be another reason to continue selling the US Treasuries. I believe that the Fed will not allow this; the projections for the future federal funds rate trajectory should not change, which will confirm the central bank’s patience.

However, this does not seem to be sufficient to clamp down on the Treasury yields rally. The ultra-easy monetary policy pushed up inflation, and it makes no sense to hold bonds amid the PCE rapid growth. Jerome Powell and his team are faced with a challenge. One of the solutions to the problem could be the phrase that the US inflation remains low, but the Fed expects a temporary surge in the inflation rate.

Another matter is whether the Fed needs to worry about rising borrowing costs? Historically low debt rates drove debt service cost down to 1.6% of GDP in 2020. And in 2021, the interest payments should continue declining, despite the recent rally in yields and an increase in the volume of bond issues.

Dynamics of US debt servicing cost

Source : Bloomberg

The USA is reaping the results of its exclusivity when, due to explosive GDP growth, it does not need to worry about bond yields rally. So, the US dollar is naturally rising. The gap between potential and actual production volumes in the eurozone is twice as large as in the United States. Yes, with fiscal stimulus from Joe Biden and transatlantic trade, the gap will be narrowing, but this requires certain conditions, including rapid vaccination, which is a big problem in Europe.

Weekly [EURUSD][1] trading plan

It is still relevant to hold the [EURUSD][1] shorts [entered on the price rise to 1.199][2]. If the price doesn’t go up above 1.193 due to Jerome Powell’s speech, it will make sense to add up to the shorts with the target profits at 1.18, 1.176, and 1.172.

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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