Dollar: from irony to sarcasm. Forecast as of 10.08.2021

2021-08-10 2021-08-10 Dollar: from irony to sarcasm. Forecast as of 10.08.2021

Dmitri Demidenko

If in the first half of the year the greenback watched with irony the attempts of EURUSD bulls to break out to level 1.25, then after the June Fed meeting its smile looks sarcastic. Resistance is useless, it’s time for opponents to surrender! Let us discuss the Forex outlook and make up a trading plan.

Monthly US dollar fundamental forecast 

Economic cycles tend to repeat, but how different recessions and recoveries can be! In 2000-2018, the number of unemployed exceeded the number of vacancies, now the opposite is true. In 2013, when the topic of QE tapering was first raised, Treasury yields began to grow at a tremendous pace, in 2021 rates during its rally turned out to be unprofitable. In 2015, as the Fed tightened monetary policy, the derivatives market signaled that the rate would rise faster than FOMC officials said. In August, despite the statements of the central bank’s hawks, investors are in no hurry to abandon the idea of ​​increasing borrowing costs in 2023. All the more surprising is the fact that the dollar smile theory works!

During a recession, the greenback smiles. It grows as a safe-haven currency, then falls due to massive monetary stimulus from the Fed, and a little later strengthens again, as the US economy begins to outpace the world. An important factor is the Fed’s reaction to economy’s dynamics. Dallas Fed President Robert Kaplan said that it will take eight months to taper QE. The head of the Atlanta Fed, Rafael Bostic, argues that the process of withdrawing monetary stimulus could go faster, and the rate should be raised in 2022. Boston Fed boss, Eric Rosengren, believes that the central bank must announce a $120 billion program cut in September. 

Based on all of the above facts, the slowness of the derivatives market looks surprising. EURUSD futures continue to signal that the first act of monetary restriction will take place in 2023, and CME derivatives only give a 65% chance of a Fed rate hike in 2022.

Dynamics of the probability of the Fed rate change in 2022

Source: CME Group.

It should be noted that before the release of the July US employment data, the odds were fifty-fifty. Their growth is the key to further US dollar strengthening.

Until recently, the yield on Treasury bonds created problems for the greenback. However, the Treasury yield’s 5-day rally contributed to the fall of EURUSD price to a 4-month low. In early 2021 there was a lot of talk about a repeat of the 2013 taper tantrum. Treasuries were selling out on expectations of the Fed’s signals about QE tapering, however, widening of shorts to multi-year highs created problems for traders, as a result of which increased demand for bonds led to losses. And only now there are adequate conditions for a rally in debt yields: the Fed is hawkish and there are doubts that high inflation will be temporary.

The release of US consumer price data for July could trigger an increase in Treasury rates and raise the likelihood that the first act of the Fed’s monetary restriction will take place in 2022. Despite the fact that Bloomberg experts expect a slowdown in CPI from 5.4% to 5.3%, inflation will continue to rise, which indicates that its target has been fulfilled, according to a number of FOMC members.

Monthly EURUSD trading plan

The dollar smile theory, belief in treasury yields growth, and the Fed rate hike in 2022 allow me to be confident in EURUSD shorts entered at levels 1.1915 and 1.188. The pair is confidently moving towards the targets at 1.1715, 1.166, and 1.158. Use corrections to enter sales.

Price chart of EURUSD in real time mode

Source: https://www.liteforex.com/blog/analysts-opinions/dollar-from-irony-to-sarcasm-forecast-as-of-10082021/