US dollar price forecast 25 March 2021

2021-03-25

Dollar drags on euro. Forecast as of 25.03.2021Dmitri Demidenko

Based on different vaccination rates and the growth gap, the [EURUSD][1] bulls should be losing. However, the strong US economy could drag on the rest of the world, including the euro-area. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

Investors were focused on the Treasury yield rally, ignoring the US weak domestic data. The drop in the durable goods orders by 1.1% M-o-M in February, following nine months of growth, added to the negative produced by declines in retail sales, industrial production, and new home sales. Nonetheless, traders were selling Treasuries, and the [EURUSD][1] was falling. What will happen when the US economic data start improving?

In fact, the Treasury yield could be growing without strong economic data. Markets are growing or falling on the expectations, and belief in the US GDP rise to 6.5% in 2021 encourages investors to sell safe-haven assets. According to the Bloomberg model, of the 84-basis-point increase in the 10-year U.S. Treasury yield since the start of the year, 60 resulted from stronger growth expectations. That’s a clear contrast to the 2013 taper tantrum when the rise in yields was driven by expectations of premature QE end.

Treasury yields growth drivers

Source : Bloomberg

So, the Fed is not worried about the rising cost of borrowing in the markets. Jerome Powell continues to repeat the mantra that it is an orderly process that does not materially degrade financial conditions. This means that the central bank should not be concerned about this. The Fed will make decisions based on evidence, but what will strong US statistics mean for the dollar?

In 2020, the US current account deficit increased to 3.5% of GDP; the budget deficit widened to 15% of GDP. The imports growth and fiscal stimulus would further expand the US twin deficit, which would press the greenback down in the long-term outlook. Eventually, foreign investors will not want to fund the US national debt, and the Fed will have to boost the QE pace to cover the deficit. Besides, increasing the US foreign trade deficit will increase the surplus in the euro-area. It means the US economy will support the euro-area growth. In addition to the increase in the global risk appetite amid the US economic data improvement, this fact will support the [EURUSD][1] bulls.

Of course, without positive changes in the euro-area economic data and vaccination process, the euro will not grow. However, I can’t say everything is that bad in Europe. Germany manufacturing PMI has featured the best rise since the records began in 1996, and European commodity prices are growing faster than US ones. The ECB could be worried about inflation!

Dynamics of commodity and materials prices

Source : Wall Street Journal

Weekly [EURUSD][1] trading plan

The euro-area PMI data provided some positive, but will the [EURUSD][1] rebound? I do not think the euro will start rising without an increase in the vaccination rate in the EU. Europe is preparing for the third wave of the COVID-19 pandemic, and the US vaccination campaign is progressing. The euro-dollar price is more likely to drop to 1.18, 1.176, and 1.172 than go back to the red line at 1.193, but this is the case when I would be glad if I were wrong. It is still relevant to sell the euro.

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}} )