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US dollar price forecast 1 July 2021 | EURUSD Fundamental analysis

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Is the inflation surge temporary? How fast will US employment recover? These are not all the questions investors try to answer. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Weekly US dollar fundamental forecast

Buy everything! There is so much money in the financial system that no one is surprised by the fifth quarter of the S&P 500 rally, which has added 14% since the beginning of 2021, or the fall in 10-year Treasury yields in response to rumors about the Fed’s monetary policy normalization earlier than anticipated, or the broken correlation between cyclical stocks and growth stocks. The cyclical stocks, as a rule, rise if investors are confident in the future growth of the US GDP; the growth stocks appreciate if there is no such confidence. The rally of both types of securities suggests that no one knows exactly what will happen to the economy.  

According to the consensus forecast of 52 experts polled by Financial Times, the US gross domestic product will grow by 6.5% in 2021, but the range of estimates is so wide that there are doubts about how quickly the service sector will return to normal, whether the deficit in the labor market will hold back economic growth, and how will consumption and saving respond to the reduction in the fiscal stimulus? According to economists, the likelihood that the federal funds rate will rise by 50 basis points by the end of 2023 is 75%. They believe that the Fed will be more responsive to accelerating inflation than employment, although I can’t entirely agree with that.

The likelihood of Fed’s rate hike by 50 bps by the end of 2023

    

Source: Financial Times

Thus, the market has to solve three riddles. Is the acceleration in consumer prices really temporary? How quickly will the US return to full employment? Finally, will the US GDP continue growing by leaps and bounds, or will it begin to slow down soon? Is it bad for the US dollar? I guess the greenback will win in both cases. We all remember the principle “a strong economy – a strong currency” very well. Still, if the growth of the US gross domestic product loses steam, it will become an unpleasant surprise for the entire world economy. Moreover, China’s economy is slowing down, judging by the latest PMI data.

Furthermore, a drop in consumer prices from 2% to 1.9% and core inflation from 1% to 0.9% in the euro area should temporarily ease the hawkish sentiment in the ECB’s Governing Council. According to Bloomberg, due to the timing of seasonal sales, CPI growth rates will decline again in July but then rise in August. Capital Economics predicts the indicator will accelerate to 2.5% by the end of 2021, followed by a slowdown to 1% in 2022.

Dynamics of euro-area inflation

    

Source: Financial Times.

The ECB’s monetary policy should remain ultra-easy for a long time, unlike the Fed’s. Dallas Fed President Robert Kaplan says it is better to tighten monetary policy sooner than later.

Weekly EURUSD trading plan

The reason for the Fed’s action could be the US jobs report, ahead of which the EURUSD is falling amid the expectations of strong data. Bears do not care any longer about growing risk appetite, and the euro has been down to the lowest levels since April. Shorts entered at levels 1.1915 and 1.19 look good. The euro is falling to a level of 1.177 indicated earlier, so it is still relevant to sell.

   

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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