Dollar is to hit the brake. Forecast as of 03.11.2021

Monetary normalization is often described as the central bank’s hitting the brake. Nonetheless, the continued rally of the US stock indexes raises doubts. Markets want explanations from the Fed. How will this situation affect the EURUSD? Let us discuss the Forex outlook and make up a trading plan.

Fundamental US dollar forecast today

The Fed was a pioneer, having announced its $120-billion-a-month quantitative easing program in the midst of the 2020 recession. The announcement of the QE end, which investors expect at the FOMC November meeting, will be a notification that the mission has been completed. The economy does not need extreme levels of liquidity. The central bank is to quit the unconventional monetary policy. The matter is what’s next.

When the Fed moves to cut back on asset purchases, the next important question is when it will start tightening monetary policy? The timing of the rate hikes is the main source of uncertainty and volatility in Forex. The forecasts of the FOMC officials and Bloomberg experts suggest that the first rate hike will take place either in 2022 or in 2023, which significantly differs from market pricing. CME derivatives bet on two or three federal funds rate hikes next year. Will this be a reason for criticism from Jerome Powell?

According to Morgan Stanley, there is a sort of concord between the market and the Fed. If investors are wrong, the central bank will point it out. If the central bank doesn’t pay attention to the market signals, it could be interpreted as “you are right.” Morgan Stanley expects the Fed Chair to announce that markets’ signals are too early, but it may not encourage investors to sell off the dollar. Christine Lagarde has already made this mistake.

Looking at the strong positions of the greenback ahead of the FOMC meeting, one could wonder what hawkish surprise can the Fed present? Most Bloomberg experts predict that asset purchases will be reduced by $15 billion per month and be completed by July, but some of them believe that the programme will finish earlier, in seven or one-to-six months.

Forecasts for speed of QE tapering

Source: Bloomberg

Given that the economy no longer needs a quantitative easing program, the Fed may say that the tapering does not follow a predetermined plan. This will allow the central bank to be flexible and signal a faster QE completion than is currently anticipated.

Monetary normalization is often described as hitting the brake, but in reality, the Fed will not even touch the brake. High inflation keeps real Treasury yields low and allows the stock market to rally up. Ahead of the FOMC meeting, all three key stock indexes have broken through all-time highs over three days in a row.

Weekly EURUSD trading plan

I don’t think the Fed will sound hawkish. Otherwise, it could lead to economic or financial stress. By informing investors what they already know and not providing any fresh information, the central bank will encourage them to exit trades, including the EURUSD shorts. If the price goes up above 1.161, one could consider entering purchases. If the Fed manages to surprise the markets, it will be relevant to continue selling the euro versus the US dollar with a target at 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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