Dollar benefits from rival’s mistake. Forecast as of 05.11.2021

When the greenback’s rivals act together, the problems with one of them could cause troubles for the rest. The BoE’s unwillingness to raise the interest rates encouraged investors to sell off the pounв, pressing down the EURUSD. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

Study, study, and study again! Other central banks should follow the example of how the Fed deals with financial markets. Although Jerome Powell linked the federal funds rate hike to the achievement of full employment, which, in his opinion, will happen in mid-2022, the chances of monetary restriction have not increased at all. The market has responded with a rise in stock indexes, which suggests that the Fed believes in maintaining ultra-easy monetary policy for a long time. Unlike the Fed, the BoE made a communication mistake, pressing down the pound and the euro.

Bank of England Governor Andrew Bailey said it wasn’t his job to guide financial markets on interest rates, hitting back against criticism that he misled investors. Traders had expected the BOE to raise borrowing costs in November and were disappointed by the decision to keep the interest rate unchanged. The UK bond yields and the pound dropped after the report that the MPC voted seven to two to keep borrowing costs unchanged.

Dynamics of GBP and UK bond yields

  

Source: Bloomberg

Interest rates are a global market. Central banks are falling short of investors’ expectations to make aggressive monetary policy moves. Regulators are signaling that their paths will be different, and normalizing monetary policy will take longer than expected.

The October rally in global bond yields has its leaders. The fastest-growing yields were on 2-year bonds of Canada and the UK; they featured the biggest rise since 2008 and 2011, 50 basis points. For comparison, the US peers increased by19 basis points during the same period. The better rise in the yields on papers issued by Fed’s competitors contributed to the corrections of the dollar pairs. As soon as the Bank of England disappointed investors, the yields of the global bond market fell, and the greenback is again among the favorites.

It is not surprising considering that the US jobs report will be published soon. According to Bloomberg experts, US nonfarm payrolls are expected to rise by 450,000 in October. However, given the improvement in the epidemiological situation, I suppose the actual data could be better. The report from the Labor Department showed that unit labor costs in the US rose at an annual rate of 8.3% in the third quarter, the highest rate since 2014.

If more companies raise prices to protect profits amid steadily rising labor costs, high inflation in the US economy will last much longer than the Fed expects. The central bank will be forced to raise the federal funds rate, which will support the dollar.

Weekly EURUSD trading plan

Thus, the weakness of the greenback rivals resulted from a decline in the global bond yields and the expectations of the US strong jobs report sent the EURUSD down to a 16-month low. A pleasant surprise from nonfarm payrolls will set the target of 1.145.

        

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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