Dollar draws historical parallels. Forecast as of 29.12.2021

Investors often use patterns to identify similar developments in the past and apply them in trading. It concerns both technical and fundamental analyses. Let’s see how it helps us predict the EURUSD‘s future evolution and make a trading plan.

Quarterly fundamental forecast for dollar

The one who doesn’t make mistakes doesn’t work. At the end of 2020, most investors were sure the USD would weaken against the euro at year-end 2021. Their assessment was based on the belief that humanity would defeat the pandemic, while rapid economic growth would increase global appetite for risk and drop the greenback against the world’s major currencies. However, the EURUSD quotes dipped over 7% at year-end amid capital flows to the US market, while the S&P 500 had 69 record closes. In 2022, the US dollar is expected to strengthen against the euro. Is the expectation wrong again?

The USD index is about to register the best result since 2015 when it grew on rising rate hike expectations. The rate was raised in the end, and the greenback then showed mixed dynamics, falling 0.3% in 2016. Bloomberg experts presume the 6-year-old scenario could repeat itself and forecast the USD index will grow by as little as 1% in 2022.

The US dollar’s positions have been solid so far. The derivatives market expects the Fed to raise the federal funds rate threefold and withdraw QE entirely in March, which contrasts with the ECB’s plan to maintain its ultra-soft monetary policy and asset-buying program until the middle of autumn at least. Those opposite mindsets make me believe the EURUSD’s downtrend is stable. 

Derivatives expectations of Fed’s rate

Source: Bloomberg.

Still, the 2015-2016 history suggests the greenback had been rising against the major currencies six months before the first rate hike. If the first monetary restriction stage occurs in March, the USD may get into trouble starting from April, specifically if other G10 central banks toughen their monetary policies. 

Excessive optimism of USD fans indicates that EURUSD bears are likely to have problems even earlier. Speculators have increased net longs in the greenback to record levels since June 2019. Some negative factors only have to emerge, and hedge funds will leave the USD as one leaves a sinking ship.

Speculative trades in USD

   

Source: Bloomberg.

The postponed realization of investment ideas that prevailed at the end of 2020 might become one of those negative factors. If humanity does defeat the pandemic and the pace of vaccinations grows faster worldwide than in the US, the EURUSD bulls might rise from the ashes amid a global economic recovery. I don’t think it will happen in Q1, though. 

Quarterly trading plan for the EURUSD

The divergence in monetary policies might have been factored in the EURUSD quotes already, but the euro is under pressure as the US doesn’t impose restrictions, and its economy will grow faster than the European one. An eventual correction of the US stock indexes puts pressure on the euro, too. So, I predict the EURUSD will fall to 1.113 and 1.1 in January-March and recommend selling the pair on growth or breakouts of support at 1.129 and 1.1225.

    

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 LiteFinance. 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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