Dollar is always right. Forecast as of 30.03.2021

There is one step from great to ridiculous. Just as the euro was the top favorite in early 2021, the US dollar seems to be the best-performing currency in Forex. Will the euro bulls managed to gain their positions back? Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

The US dollar seems to be always at a profit. Whatever happens, investors have arguments to enter dollar longs. The escalation of the US-China conflict, including the resumption of the trade war, is a reason to buy the greenback. Correction of the US stock indexes is a reason to buy the greenback. New stimulus from Joe Biden’s government and the associated increase in reflation trade are reasons to buy the greenback. However, the lack of flexibility could result in a loss.

The GDP growth difference between the US and the euro area in the first quarter may reach 10%. The US manufacturing PMI will rise above 60, and inflation will soon reach 3-4%. So, the EURUSD downtrend is natural and will hardly end soon. Traders like to draw historical parallels, and the euro’s failure to break through to $1.25 gives rise to sad memories of 2017-2018.

Dynamics of EURUSD

Source: Nordea Markets

Due to rapid vaccination roll-out and an additional $1.9 trillion fiscal stimulus from Joe Biden, experts surveyed by IHS Markit upgraded the forecast for the US GDP for 2021 from 4% to 6.3%, the Fed – from 4.2% to 6.5%. Furthermore, history shows that economists tend to underestimate the expected growth during GDP expansion. With a new $3 trillion aid package and a $2.9 trillion increase in US households’ savings during 2020, the US GDP could expand even more. Likewise, the growth gap between the USA and the euro area should also widen, which has always supported the EURUSD bears.

Dynamics of EURUSD and the ratio of expected GDP growth in USA and euro area

Source: Nordea Markets

The euro must have new advantages to change the trend, and the European currency has yet more flaws than benefits. Germany’s unwillingness to ratify the European recovery fund project, the third COVID-19 wave, the increased volumes of the ECB asset purchases under the PEPP (in the week ended March 25, the central bank acquired securities for €19 billion, which is higher than the average value since the beginning of the program), as well as the aggravation of the US-China relations, which could result in a new round of the trade war, make it unprofitable to buy the EURUSD.

The dollar looks like the top performer, just as the euro did in early 2021. Forex situation changes very fast, and everything could turn upside down at any moment. The dollar could lose its dominance very quickly, but there are no reasons for it now. Moreover, the growth of the US employment by 643,000 and a drop in unemployment to 6%, as Bloomberg experts expect, should support the Treasury yields rally, pushing up the USD.

Weekly EURUSD trading plan

The March jobs report will be published on the last day of the quarter, when the stock market is closed for the Good Friday holiday, which increases the risk of unexpected market moves. Financial managers re-balance the portfolios at that time, and the thin pre-holiday market could swing up and down. It is dangerous to trade in such conditions, and EURUSD consolidation around level 1.176 looks logical. If the bulls fail to hold the price above this level, the euro will continue falling, but I would wait and look.

    

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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