Dollar fills in the dots. Forecast as of 04.11.2021

At first glance, the Fed hasn’t told the market anything new, announcing the tapering of the QE. Slight changes in the language of the central bankers have clarified a lot. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

While the ECB shrugs off market signals, the Fed is encouraging them. At a press conference following the November FOMC meeting, Jerome Powell has said it is not the time to raise rates, and the Fed can afford to be patient, as the labour market has not yet fully recovered. At the same time, the Fed chair suggested that the US will achieve full employment by mid-2022. It could be interpreted as a confirmation of investors’ expectations for the first federal funds rate hike in June 2022.

The US central bank, as expected, has announced it is to start tapering the $120-billion quantitative easing programme in November. The Fed intends to reduce the volume of Treasury bond purchases by $10 billion a month, the mortgage bond purchases – by $5 billion in December. Next, the pace of stimulus tapering can be adjusted if justified by changes in the economic outlook. Jerome Powell noted that the Fed is ready to speed up or slow down if necessary.

Remarkably, the wording that the high inflation reflects temporary factors was replaced by the phrase “factors that are expected to be transitory.” The central bank has secured a path to retreat from its neutral position on interest rates. If inflation continues to stay at elevated levels for longer than anticipated, the rates could be raised.

The Fed expects a slowdown in price growth in the spring or summer of next year. If it does not happen by that time and the labor market fully recovers, the door for aggressive monetary restrictions will be open. Currently, the derivatives market bets on a 75% chance of two rate hikes in 2022 and about 40% of three hikes.

Dynamics of expectations for the Fed’s interest rate changes

    

Source: Bloomberg

Unlike the Fed, the ECB insists that the markets are wrong. Christine Lagarde said the Governing Council has clearly articulated three conditions for the rate hike, and they will not be met in 2022. The European central bank continues to go against the market expectations, which could end badly for it. There are examples among other central banks. The Reserve Bank of Australia had to abandon the yield curve control due to the inability to keep it at the required level.

I believe the EURUSD rise after the announcement of the FOMC meeting’s outcomes resulted from market participants exiting shorts, as investors felt that the central bank had not told them anything new. In fact, Jerome Powell has made it clear when exactly the Fed intends to raise rates and that it will tolerate high inflation and support the labour market recovery. Furthermore, the announcement that the pace of the QE tapering can be adjusted in 2022 has come as a hawkish surprise.

Weekly EURUSD trading plan

In the current situation, the significance of the US jobs report has increased. Bloomberg experts expect to see an increase in non-farm payrolls by 450,000 in October. However, given the improvement in the epidemiological situation, the actual data can be stronger, supporting the US dollar buyers. If the price breaks out the support zone of 1.157-1.1575, one could enter EURUSD shorts.

      

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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