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Dollar and the sense of guilt. Forecast as of 19.05.2021

The easing of the risks of the euro-area break-up after the German Federal Constitutional Court verdict, acceleration of the vaccination campaign in the EU, and the Fed’s ultra-easy monetary allowed the EURUSD to return above 1.22. What’s next? Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

It is better to regret what you did than what you did not do. The Fed’s unwillingness to respond to the inflation surge may be nothing more than a feeling of guilt for the actions of its predecessors. After the 2008-2009 recession, the central bank tapered QE and raised rates, fearing a surge in consumer prices. In fact, it did not happen, the Federal Reserve turned out to be wrong, and it doesn’t want to repeat the previous mistakes. The Fed is willing to maintain its ultra-easy monetary policy for a long time, which will support the EURUSD growth.

However, the ECB officials started using the phrase that there was no risk of a durable return of inflation in the euro area. For example, François Villeroy de Galhau noted that the ECB’s monetary policy should remain very accommodative. The EURUSD is rising not because of the divergence in the central banks’ monetary policies. So, what’s the reason?

At first sight, the US economy is growing faster than the euro-area one. The US GDP was up by 1.6% Q-o-Q in the first quarter, the euro area slid into the double-dip recession. Even a significant upgrade of the euro-area growth outlook of 4.3% in 2021 presented by the European Commission is much below the US growth expectations of 6% and higher. 82.8% of the population have been inoculated in the US, while in the EU, the share of the vaccinated population is 44.8%. Fortunately, markets are rising on the expectations. In fact, the euro-area economy is more likely to exceed the forecasts than the US growth to meet the expectations of the IMF.

IMF GDP forecasts


Source: Financial Times

High-frequency data indicators, including an increase in the number of job adverts, growth in travel to entertainment and leisure venues, and rising holiday bookings, suggest that the euro-area economy should rebound from its double-dip recession in the second quarter. Oxford Economics expects the euro-area GDP to grow 1.5% in April-June. The reason is the vaccination acceleration in the EU, which increases the chance of the economy’s reopening, followed by a booming growth.

Dynamics of vaccination in EU countries


Source: Bloomberg

Another reason for the EURUSD bulls’ optimism has become Germany Constitutional Court“s verdict that the European Central Bank’s quantitative easing program was legal and didn’t suggest direct funding of governments, as insisted by the claimants. Karlsruhe is losing its role of lender of last resort for German euro critics. Therefore, the easing of the risks of the QE end because of the court verdict encourages the euro buyers.

Weekly EURUSD trading plan

What benefits does the US dollar have? Is it magic number 4? since 1957, the S&P 500 has fallen 8 times out of 9, 3 months after US inflation exceeded 4%. The exception was 2005 when the CPI quickly returned below this value. What will be this time? The controversial reports on US employment and inflation have been evidence that inflation is growing because of the supply disruptions rather than the higher demand. The temporary factor allows the |Fed to maintain its current monetary policy, supporting the EURUSD rally. The euro has reached the first of the earlier indicated targets at $1.22. Will it reach the second one at $ 1.226?


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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