US dollar price forecast 21 September 2021 | EURUSD Fundamental analysis
The stock market is responsive to the talks about potential defaults of the USA and China’s real estate giant Evergrande. Forex traders are focused on the Fed’s policy. Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly US dollar fundamental forecast
Like Janet Yellen cannot deliver a precise deadline for the default, investors cannot determine when the market turmoil will end. The S&P 500 plunged 2.5%, its worst drop since March. The index is on track for its worst monthly performance since September 2020, and Morgan Stanley warns of growing risks of its 20% drawdown. Investors are searching for safety, and the USD index is up to the zone of August highs. However, the EURUSD has found support in the zone of 1.17-1.1715
Dynamics of USD index
Of course, in financial markets, everything is interconnected, and exchange rates are determined by capital flows. Nevertheless, there are always two currencies in any pair, and the euro currently has some benefits. The epidemiological situation in the EU looks better than in the USA, the euro-area economy is not going to slow down in the third quarter, unlike the US one, and the elections in Germany may change approaches to fiscal discipline.
Opinion polls suggest that SocialDemocrat leader Olaf Scholz, who prioritizes spending increases over quick debt reduction, will take over as German Chancellor. Germany sets the tone for the rest of Europe, so the principles of fiscal consolidation in the EU could be abandoned. And this, in turn, is fraught with an increase in budget expenditures and GDP acceleration.
Markets continue discussing rumours that the ECB may raise interest rates earlier than currently assumed. According to the Financial Times source familiar with the matter, the chief economist of the central bank Philip Lane said in a private conversation with German businessmen that by the end of the three-year forecast period, the euro-area inflation would reach the target of 2% on a stable basis. The European regulator denied this information, stressing that the idea of a rate hike in 2023 does not correspond to its forecasts. However, there is no smoke without fire.
Treasury yields do not grow, pressing down the US dollar. Despite high inflation, a strong report on retail sales, and expectations of the QE tapering, Treasury yields have stalled. Some analysts suggest that even a reduction in the Fed’s asset purchases will not drive the Treasury yields higher amid the high demand of foreigners for the US bonds. In August, foreign investors bought 25% and 22% of 10-year and 2-year securities at auctions, the highest level in three years and since December 2019.
Dynamics of Treasuries bought by foreign investors at auctions
Source: Financial Times
Weekly EURUSD trading plan
Unlike the stock market, Forex is gradually calming down. The stock market is shaken by the US potential default due to the problems with the national debt ceiling and growing fears of China Evergrande defaulting. However, Forex traders are focused on the monetary policy. Will the Fed announce QE tapering in September? How will FOMC forecasts for the interest rate change? As I suggested, the EURUSD should be consolidating ahead of the Fed meeting. The trading range should be 1.171-1.177. I do not recommend entering any trades.
Price chart of EURUSD in real time mode
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