US dollar price forecast 26 March 2021

2021-03-26

Dollar likes riddles. Forecast as of 26.03.2021Dmitri Demidenko

The US exclusivity, increasing demand for the Treasuries, and the talks about QE tapering by the Fed have sent the [EURUSD][1] to the lowest level since November. What if the negative has already been priced in the pair’s rate? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

Hardly had investors solved the previous Fed’s riddles when the central bank offered a new one. Jerome Powell said the Fed “will gradually roll back” the $120 billion monthly bond purchases the Fed currently makes “when the economy is all but fully recovered.” The question is, what exactly does the Fed Chair mean by the word “economy”? If he talks about the US GDP, then the FOMC’s optimistic forecast of 6.5% for 2021 suggests that the indicator may return to pre-pandemic levels as early as the middle of this year. Will the Federal Reserve officials discuss the QE reduction in April? If they do, the [EURUSD][1] drop in March is just the beginning.

After all, Powell may not mean the GDP. Federal Reserve Vice Chair Richard Clarida said it would take some time for economic activity and employment to return to levels that prevailed at the business cycle peak reached last February. Employment is still far from the pre-crisis levels, and the FOMC forecast for unemployment suggests that its level at the end of 2021 will be higher than before the crisis. Will the Fed continue to buy Treasury and mortgage bonds in the same volume at least until the end of this year? If so, the [EURUSD][1] bulls could go ahead, provided there is good news from Europe.

Anyway, history shows investors have been more aggressive on tightening monetary policy than the Fed since 2008. After the previous recession, the market expected the federal funds rate to rise two years after the crisis ended. In fact, the central bank raised it only in late 2015.

Dynamics of market expectations and federal funds rate

Source : Bloomberg

US dollar now has several advantages. They include successful vaccination (Joe Biden promised to inoculate 200 million Americans by the time of the expiration of the first 100 days of his term in office, which is twice as much as previously expected), growing demand of foreign investors for Treasuries, and, most importantly, the US exclusivity. According to Bloomberg research, the advanced economies will mostly benefit from the US fiscal stimulus. On the other hand, emerging markets can face a strong economic downturn resulting from the greenback strengthening. Uneven economic growth plays into the hands of the [EURUSD][1] bears.

Impact of Joe Biden’s stimulus on world’s economies

Source : Bloomberg

How can Europe respond? Appeals from Italian Prime Minister Mario Draghi to the EU on the need to accelerate vaccination? Or a statement by ECB Vice-President Luis de Guindos that if the number of injections in Europe rises sharply by summer, the euro area will experience an economic boom in the second half of 2021? I would like to believe, but it seems that the [EURUSD][1] bulls need something more convincing than the officials’ words.

Weekly [EURUSD][1] trading plan

The euro has reached the downside targets at $1.18 and $1.176 indicated in the [previous articles][2]. Will the bears drive the price deeper? It won’t be relevant to buy the [EURUSD][1] until the pair goes up above 1.192. Meanwhile, I prefer to take a part of profits from the shorts entered at levels [1.199][3] and [1.193][2].

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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