Is dollar overbought? Forecast as of 09.12.2021

Traders are cautious ahead of the report on the US inflation and central banks’ meetings, and the EURUSD is widening the trading range. What’s next? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

Any coin always has two sides. Bloomberg experts predict an acceleration in the US inflation rate from 6.2% to 6.8% in November. Investors believe the inflation rate of 7% and higher will push Treasury yield up, strengthening the US dollar. But what if consumer prices start slowing down? How will the Federal Reserve react? Jerome Powell and his colleagues have convinced investors that they are ready for aggressive monetary restrictions, but what if they have to backstep? If so, the greenback will look overbought.

According to more than half of 48 Financial Times experts, the $120-billion quantitative easing program will be completed by the end of March. 10% of respondents expect that this will allow raising the federal funds rate in the first quarter. 50% of those surveyed predict that the federal funds rate will be raised in the second quarter. This is in stark contrast to a study three months ago, when only 20% of economists suggested that borrowing costs would rise during the first half of 2022.

Forecasts for first rate hike by Fed

Source: Financial Times

However, about 70% of experts said that the federal funds rate will not rise above 1.5% by the end of 2023, which implies a very gradual normalization of monetary policy. It can be assumed that a significant part of the positive for the greenback has already been priced in the EURUSD exchange rate, while the hawkish shift in the ECB stance may become a pleasant surprise for the euro bulls.

According to the executive board member of the ECB, Isabel Schnabel, asset purchases were “an important tool” during times of market turmoil or recession, “but their cost-benefit ratio deteriorates as the economy gains ground.” The quantitative easing programme inflates asset prices and creates risks of financial instability. Furthermore, this policy could result in a shortage of sovereign bonds in some countries such as Germany.

The hawkish speech of an authoritative ECB official, the rally in US stock indexes, indicating an improvement in global risk appetite, and JP Morgan’s forecast that the global economy will fully recover and the pandemic will end in 2022 have sent the EURUSD up to 1.135. The S&P 500 was supported by the news that a three-dose course of Pfizer vaccine completely neutralized the omicron in vitro. The US stock indexes rally presses down safe havens like the US dollar and the Japanese yen.

Weekly EURUSD trading plan

The euro hasn’t risen higher as the GBP dropped because of the rumours about the government’s plans to impose new restrictions amid the new variant of COVID-19. Furthermore, Latvian central bank chief, Martins Kazaks, has said that if the omicron variant of Covid-19 spills over into significant and large negative revisions to the outlook for the euro-area growth, the ECB could extend the PEPP. The EURUSD traders are unwilling to enter the market ahead of the US CPI report and central banks’ meetings, which makes consolidation a likely scenario. If the euro rises above $1.138, the correction could drive the price higher.


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 LiteFinance. 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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