Dollar is stronger than euro. Forecast as of 01.11.2021

To succeed in trading, one should understand which factors have been priced and which are yet to be priced in the foreign exchange rates. A typical example of how the principle “buy the news, sell the facts” was the last day of October. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

The euro seems weaker than the dollar, as one can see from the EURUSD price chart. The euro bulls failed, although the euro-area economic expansion was stronger than the US in the third quarter, and the euro-area inflation hit 4%, which has been only the second time in history. The major currency pair has dropped to its 16-month low amid investors’ concerns about a longer high prices pressure than the Fed claims.

Compared to the euro-area GDP growth of 9.1% Y-o-Y in July-September, + 2% for the US economy looks rather weak. The euro-area economy won thanks to a better epidemiological environment, growth in business and consumer activity after the lifting of lockdowns, showing more expansion in the third quarter than in the second of +2.2% Q-o-Q. However, the energy crisis will surely press down the euro-area growth in October-December; its economy still has not fully recovered from the recession, while the US will begin to benefit from the decline in the number of COVID-19 cases.

Dynamics of GDP in euro-area countries

Source: Bloomberg.

Moreover, the euro-area inflation hit 4%, while Bloomberg experts predicted 3.7%, which should have encouraged the ECB to take active steps. However, Christine Lagarde and her colleagues remain passive, accusing the markets of incorrect pricing.

Dynamics of euro-area inflation

Source: Bloomberg.

Thus, the euro area featured strong GDP and consumer prices reports, but the EURUSD bulls didn’t go ahead. What’s the reason? Markets are known to grow on expectations, and the factor of strong domestic data was priced in the euro-dollar quotes. Following the actual data release, expectations shifted to US inflation, employment, and the Fed meeting.

In September, the personal consumption expenditure index rose 4.4%, the highest level since 1991. At the same time, civilian wages in the United States jumped by 1.5%. This is the greatest increase in the data series since 2001. Investors immediately remembered the 1960s, when the Fed thought it could control the hot labour market without increasing inflation. The US central bank was wrong then and may again make the same mistake. For example, Goldman Sachs believes that consumer prices in the United States will stay above 4%, even when the Fed finishes its quantitative easing program. This gives the bank reason to shift the first federal funds rate hike forecast from 2023 to July 2022.

Weekly EURUSD trading plan

Strong data on US inflation and wages increased the chance of the first Fed’s rate hike in the middle of next year from 77% to 90%, although a month ago it was 15%. It is not surprising that against such a background, coupled with the expectations of the FOMC hawkish tone and strong US jobs report in October, the EURUSD hasn’t consolidated above 1.168, as expected, and has dropped. Considering the strong economic calendar for the dollar, the euro should continue falling towards $1.149 and $1.145. Hold short trades and add up to them from time to time.

    

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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