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Dollar fooled the bears. Forecast as of 03.05.2021

Will the euro-area economy catch up with the US amid the increase in the vaccination rollouts? The answer to this question will determine the EURUSD trend. Some investors doubt a soon euro-area economic rebound, which resulted in the euro drop on the last day of April. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

The US dollar has again surprised the experts. In late 2020, most banks and investment companies forecast the EURUSD growth to 1.25 in the first quarter of 2021. However, slow vaccination in the EU and the Treasury yields rally sent the euro down to 1.17. Many euro bulls turned out to become bears. Once it happened, the major currency pair immediately started rising. As a result, Commerzbank increased the EURUSD forecast to 1.23 by the end of the year. Bloomberg Intelligence sees the euro at $1.25 in late summer, and Citigroup – at $1.275 by the end of the third quarter. The best dollar daily rally over the past two months makes me think that experts could have been fooled again!

At first sight, the primary reason the EURUSD crash on April 30 has become the divergence in the economic growth. Especially since the US continues reporting positive domestic data. Record growth in household income (+ 21.1%), the highest increase in consumer spending since summer 2020 (+ 4.2%), acceleration of PCE to 2.3%, and stronger PMI data confirm that the US economy is steadily expanding.

Dynamics of GDP in euro area and USA

    

Source: Financial Times

I believe the reason is fear. Strong US domestic data made the EURUSD buyers doubt that the idea of narrowing growth gap between the euro area and the USA amid the vaccination acceleration in the EU will work out. In the week ended April 27, hedge funds reduced euro shorts to the lowest level since early March. Moreover, the risk reversals signaled the highest optimism concerning the major currency pair since late February. The US-Germany bond yields spread was narrowing, and banks were improving the forecasts for the EURUSD. Forex traders were too optimistic and they went down for it.

US-Germany 10-year yield spread

Source: Bloomberg

The dollar rally was triggered by the statement of Dallas Federal Reserve Bank President Robert Kaplan that it might be time to discuss the QE tapering. Nevertheless, the Fed has repeatedly emphasized that it should be patient, which limits the potential for the Treasury yields rally in and the EURUSD correction. After all, whether US GDP will grow to 6.5% in 2021 will depend on US consumer spending. US consumers seem to be willing to invest in stocks rather than the economy. The share of stocks in the financial assets of households reached 41%, the highest ever.

Weekly EURUSD trading plan

I believe investors were too early to start selling the euro. Yes, the price drop allowed to work out the trading idea of short-term EURUSD sales at 1.209 suggested in the previous article. However, once the market stabilizes, it will be relevant to look for buy entries. I suggest the first buy signal should be when the price rebounds up from the supports at 1.198 and 1.193 or goes up above 1.2045.

    

 

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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