Fundamental Forecast as of 05 Feb 2021
The leading vaccination rate in the USA compared to the euro area contributes to the expansion of divergence in economic growth and presses down the EURUSD. How long can this last? Let us discuss the Forex outlook and make up a trading plan.
Fundamental US dollar forecast for six months.
The greenback seems to be smiling… The USD index has been growing for four weeks out of five this year, featuring the best trading performance since October in the first week of February. It reminds me of the dollar smile theory. According to the theory, the USD, first, strengthens amid the concerns about the recession risks; next, the dollar weakens amid the Fed’s aggressive monetary stimulus. Then, it strengthens again amid the USD GDP rate outpacing the global growth.
The dollar smile theory fits well with the concepts of the greenback transformation from a safe-haven asset into a risky currency and uneven economic growth. The USD is strengthening even amid the growth of the US stock indexes, which break through all-time highs. Joe Biden is ready to compromise with the Republicans and reduce the previously announced fiscal stimulus amount of $1.9 trillion, but hardly by much. Investors expect $1 trillion, and if the actual aid package is larger, the S&P 500 will continue to rally. At the same time, the inverse correlation of stock indices with the US dollar is weakening, which, amid Treasury yields growth, suggests a change in the US dollar status. Why not use yesterday’s safe-haven asset as a risky currency in carry trades today?
Remarkably, Reuters experts still believe that the current USD rally is just a temporary surge. According to 63 out of 73 economists, the greenback in 3 months will remain at current levels or decrease. The consensus forecast assumes EURUSD will rise to 1.23 and 1.25 in 6 and 12 months. Many experts believe that the outperformance of the US economy will ultimately crash the dollar. The US and China will become the drivers of the global GDP growth, which will negatively affect safe-haven assets. In addition to the progress in the euro-area vaccination campaign, this will result in the EURUSD uptrend recovery. I share the same point of view.
The main risks for this scenario are in the uneven recovery of the world economy, which will allow the dollar smile theory to work out, and suggest an earlier than currently assumed Fed’s monetary normalization. If the dollar bulls use both of the greenback’s advantages, we can consider the EURUSD uptrend to be broken down.
The uneven distribution of vaccines suggests that the GDP will grow in some countries and contract in other ones. But still, I hope that the EU’s efforts to accelerate the vaccination process will be successful, and the euro area, together with China and the US, will become a driver of global economic growth. The Fed should consider the US economic situation and the global growth as well before deciding to wind down the QE.
EURUSD trading plan for six months.
Therefore, I bet on a 70% chance that the EURUSD will reach level 1.25 in 2021. The euro medium-term outlook remains bullish. In the short run, it is still relevant to sell the pair and hold down the shorts entered at level 1.208.
EURUSD current rate in the Forex market:
EURUSD = 1.19650
1-day change: -0.38 (-0.00458%)
US Non-Farm Payroll Data Forecast
For the Month Of January 2021
A sharp rally can be seen in global markets in the year 2021 amid multiple cues like U.S new Presidency, stimulus package optimism, progressive rolling out of Covid-19 vaccine & recovery in economic conditions.
This widely boosted up the market sentiments on long run. Additionally, the investors will be looking forward to the result of first Non-Farm Employment Change data release of the year 2021 which is to be held on February 5th, 2021.
The figure shows a change in the number of employed people during the previous month, i.e. January, excluding the farming industry.
According to U.S report, a rise in employment figure is forecasted by 62K against the fall of 140K in the previous month & an Unemployment Rate is expected to remain steady at 6.7% same as prior reading.
Bulls may be further extended in indices if results are out as per the expectations.
For the data release of U.S ADP Non-farm Employment Change on February 03, the number of employed people increased by 174K higher than the previous figure -78K which may contribute into expectation of positive results of NFP data.
If NFP data comes out to be weaker, then the possible effect can be – weak US Dollar Index, strong precious metals & softer global indices.
Other way round, if data shows upbeat results, then an upside in indices & selling pressure in Gold can be noticed.