Dollar and others. Forecast as of 02.11.2021

Actions of some central banks have been already priced in the rates of their local currencies. Other regulators do not signal monetary normalization, which they are expected to do. How this fact will affect the EURUSD. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

Dollar and all the others. A giant shift takes place in the monetary policies of central banks. Bank of America estimates the world’s central banks poured about $23 trillion into the financial system to help the global economy fight the recession. Now, it is time to start tapering the stimulus. The foreign exchange rates will depend on the action of the Fed and other central banks. The Bank of Canada is to quit the QE, the Reserve Bank of Australia is unwilling to maintain the 3-year bond yield at 0.1%, and the Bank of England is to raise the interest rate. These factors support the CAD, the AUD, the GBP, and other G10 currencies, including the euro.

Narrowing, inflation, tightening. It is in this mode that the world economy and financial markets operate. The world’s leading central banks will eventually unwind their bond purchases. Furthermore, if inflation remains high, the world’s central banks will have to raise interest rates and, perhaps, more aggressively than currently expected. And markets are betting on the central banks whose potential of monetary tightening is underestimated. It may not be the Fed. Everything is clear and transparent in the US. Investors expect tapering of the QE from November 2021 to mid-2022 and two rate hikes next year. And the BoE monetary policy also seems to be predictable. The BoE is expected to raise the interest rate by 100 basis points in 2021-2022. Conversely, the Reserve Bank of Australia is likely to backtrack from its mantra of raising the cash rate in 2024. The ECB can do the same. This circumstance supports the AUD and encourages the euro bulls to go ahead.

Central banks’ monetary policy is reflected in the bond markets. Previously, central banks affected bond markets; now, investors in bonds test them for strength. Will the RBA refuse to hold the 3-year bond yield at 0.1%? Will Christine Lagarde dissuade the markets? Will the Fed hinder economic growth by tapering the QE and raising the rates? Based on the flattening of the US bond yield curve, investors are concerned about the questions mentioned above.

Dynamics of US bond yield curve

Source: Bloomberg

After all, a decline in 10-year yields may result from the Treasury’s intention to reduce the volume of bond issues. According to several Wall Street banks, sales of regular coupon-bearing debt will be pared back by some $1 trillion by about the third quarter of 2022. Treasury Secretary Janet Yellen is not worried about signals sent by the bond market. She claims there is a good, reliable recovery in the US economy, which is not at all similar to the recovery after 2008 because currently, the unemployment rate has dropped significantly.

Weekly EURUSD trading plan

If the lawmakers are not concerned about the risks of the US GDP downturn, also because of the Fed’s monetary normalization, why should ordinary traders care? It should be taken for granted, and investors should focus on the outcomes of the FOMC meeting and US jobs report. Although the EURUSD bulls seem to be willing to go ahead, the hawkish tone of the Fed officials and strong US jobs report should discourage the euro buyers. If the price rebounds from the resistance levels of 1.16, 1.1615, and 1.1635, it will be relevant to sell the pair.

   

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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