Dollar: wag the dog. Forecast as of 10.11.2021

While the monetary policy of the Fed and the ECB is quite transparent, other central banks try to draw investors’ attention. How does this affect dollar pairs in general and EURUSD in particular? Let us discuss the Forex outlook and make up a trading plan.

Fundamental US dollar forecast today

Сentral banks’ unwillingness to tighten monetary policy in response to the inflation rise is pushing real interest rates down. It hasn’t been since the 1970s! On the one hand, this reduces debt servicing costs and allows governments to increase the debt. On the other hand, it inflates bubbles in asset markets and exacerbates the risks of financial instability. For example, the S&P 500 recorded eight new all-time highs in a row, which has not happened since 1997. The correction of the US stock index discouraged the EURUSD bulls, luring investors back safe havens.

Currently, the difference between nominal rates and inflation is -5.3% in the US, -4.6% in Germany, and -3% in Britain. Without tightening monetary policy, central banks will continue the party for financial markets, but they will have to take away the punch bowl sooner or later. Many regulators start considering raising the rates.

Dynamics of real interest rates

    

Source: Financial Times

Of the issuers of G10 currencies, the Reserve Bank of New Zealand has already raised interest rates, and the Bank of Canada has finished the QE. Expectations that the Bank of England would follow their path inflated bond yields around the world, but frustration with its reluctance to raise borrowing costs led to a sharp drop in yields. As a result, a rather curious situation is developing in the world economy, when the regulators of small economies influence the US and global debt markets more than the Fed. It looks like the tail wagging the dog.

I have many times pointed out that the willingness of some central banks to be ahead of the Fed in terms of monetary tightening creates a division between the dollar and other currencies. Hawkish signals of central banks other than the Fed strengthen the entire class of currencies. Differently put, the BoE’s refusal to hike the interest rate pressed down not only the pound but the euro as well. However, Andrew Bailey claimed that the BoE would still be tightened, which supported both the sterling and the euro.

The euro has also been supported by the news that the ZEW indicator of economic sentiment for Germany increased for the first time over the past 6 months. Due to disruptions in supply chains, Germany is turning from the locomotive of the euro-area economic growth into its brake, so the good news from Berlin supported the EURUSD bulls. However, the US producer price index increase by 0.6% from the prior month and 8.6% from a year earlier and the S&P 500 correction did not allow euro buyers to consolidate the price above figure 16 against the US dollar.

Dynamics of US producer price index

  

Source: Bloomberg

EURUSD trading plan today 

The indicator change suggests the US inflation should remain high for a longer time than the Fed expects, and it can further increase. The growth of consumer prices by 0.8% M-o-M in October could be a reason to continue selling the EURUSD if the price breaks out the support at 1.157. Bloomberg analysts expect the US CPI to increase 0.6% M-o-M and 5.8% Y-o-Y.

    

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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