Dollar lives to fight another day! Forecast as of 22.10.2021

No trend goes without a correction. The matter is how deep the correction will be. The EURUSD downtrend is not going to reverse, and traders wonder how high the price will rise in the correction. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

Is it relevant to sell the US dollar if the global economic growth is slowing down, and the Fed could raise the federal funds rate twice in 2022? In the second half of October, some investors have expected central banks to tighten monetary policy earlier than previously suggested and faster than they wished. However, the Fed can well do the same. Some could argue the Fed should act slower than other central banks. Nonetheless, Jerome Powell and his colleagues have different targets and the targets should be met soon.

According to PIMCO, the US economy is accelerating. This is facilitated by several reasons. The number of COVID-19 cases is decreasing, consumers are actively spending their savings, the proportion of fully vaccinated populations is increasing. The company reports an increase in activity in the tourism and recreation sectors. Besides, contracts to sell the US previously owned homes increased by 7% in September, and the number of jobless claims fell to 290,000 in the week ended October 15. Therefore, things are not as bad in the USA.

An increase in the US GDP rate and strong corporate reporting (according to FactSet, 81% of the 80 reported companies in the broad stock index base outperformed forecasts) allowed the S&P 500 to hit its 55th record close in 2021. But what if it’s because of the US exclusivity, not because of the global growth acceleration? If so, the US stock market rally will not support the EURUSD bulls. Furthermore, the higher the US stock indexes, the better US financial conditions. So, the Fed will have more opportunities to normalize its monetary policy.

Dynamics of financial conditions in USA and euro area

  

Source: Bloomberg

The weakness of the banking system and the lower valuation of European equities compared to American peers contribute to tighter financial conditions in the euro area than in the USA. This limits the actions of the ECB. Although financial markets want Christine Lagarde and her colleagues to raise the interest rates in 2023 or even 2022 amid inflation rise, the Governing Council will hardly do so until 2024. The divergence in monetary policies will continue to support the EURUSD bears, so the correction up is rather limited.

Weekly EURUSD trading plan

At its October 28 meeting, the ECB is likely to maintain its mantra about the temporary nature of high inflation, which will allow it to leave the door open for expanding regular quantitative easing program after the PEPP ends in March. At the same time, Christine Lagarde will put pressure on the markets, which have expected the ECB to signal the interest rate hike over the next 12-18 months. These factors, along with weak data on the euro-area PMI for October, could be a reason to sell the EURUSD on the breakout of the support at 1.1615. After all, the range of medium-term consolidation has not yet been determined. It could be 1.155 – 1.18 and 1.145 – 1.168.

  

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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