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US dollar price forecast 22 September 2021 | EURUSD Fundamental analysis


The stock market is rising, while Forex is trading flat. It is clear what investors prefer currently. But things could radically change already in September. Let us discuss the Forex outlook and make up a EURUSD trading plan.

Monthly US dollar fundamental forecast

While the synchronization of monetary policy by the world’s leading central banks has put the international currency market to sleep, the September Fed meeting may wake it up. Advanced economies’ regulators have responded similarly to the crisis and intend to slowly normalize monetary policy as economies recover. Until recently, no one expected the Fed to raise the federal funds rate earlier than 2023 and the ECB – earlier than 2024. As a result, EURUSD in 2021 marks the narrowest trading range in history, and the average trading volume in foreign exchange futures and options, according to the CME data, dropped to its lowest level since 2009. Is it time to wake up?

Dynamics of EURUSD trading ranges

 

  

Source: Financial Times

When stocks are rising, and currency pairs are trading flat in narrow ranges, it is clear what investors prefer. Interest in Forex should increase when central banks move in different directions. It is the divergence in monetary policy that gives rise to the most violent trends. Until June, there was no sign of discrepancy.

At its June meeting, the Fed tried to encourage Forex traders by sending a signal of a possible rate hike as early as in 2022. Then, 7 out of 18 FOMC officials voted for this scenario. If at least two more join them, half of the Open Market Committee will predict that the first act of monetary restriction will take place as early as next year. Along with the ECB’s reluctance to change interest rates until at least 2024, divergence will become a reality. Forex must wake up!

June FOMC forecasts for federal funds rate

Source: CME Group

Yes, one could argue that the dot plot is for informational purposes and is not a guide to making decisions, but the verdict is made by people. And suppose FOMC officials are more worried that the new wave of COVID-19 and its associated supply chain disruption will make high inflation a long-term phenomenon. In that case, they will certainly want to raise the interest rate sooner rather than later.

By far, the Fed’s rate forecast is the biggest mystery facing financial markets. Even the announcement of the QE tapering or its absence will not come as a surprise to investors. Most likely, the Fed will not the economic progress in achieving its dual target and announce that this circumstance creates the basis for a reduction in asset purchases under the QE already in 2021. Another matter is the dot plot…

The shift of the potential rate hike from 2023 to 2022 could actually hurt the credibility of Jerome Powell, who previously spoke of no link between the end of the quantitative easing program and the start of a federal funds rate hike. It is not preferable for a man preparing for re-election as Fed chairman.

Monthly EURUSD trading plan

I believe a change in the FOMC median forecast for the federal funds rate will suggest the EURUSD downtrend is stable. Of course, the euro could start rising at first if Jerome Powell manages to reassure the markets. Nonetheless, the most likely scenario suggests that it should be relevant to sell the pair with targets at 1.168 and 1.156.

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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