US dollar price forecast 30 September 2021 | EURUSD Fundamental analysis
The US economy is strong, and its European counterpart has moved off the edge of the abyss but has not yet gone out of the forest. In such conditions, investors have the right to expect an increase in the Federal Funds rate and the ECB’s preservation of ultra-soft monetary policy. How will this affect EUR/USD? Let’s discuss it and make up a trading plan.
Monthly US dollar fundamental forecast
Of the two evils, everyone usually chooses the least. The distortion of the bond market seemed to the Fed to be far less evil than the recession, so the central bank turned on the printing press at full capacity in March 2020. As a result, the economy was saved, but investors could no longer get valuable information about its state by looking at the debt market. Treasury yields remained low for a very long time, and the Powell gap only widened as global GDP recovered. In autumn, it started contracting. That pushed the EUR/USD pair to a 14-month minimum.
Usually, bonds are sold when investors’ confidence in the bright future of the economy grows and/or fears about accelerating inflation increase. Until recently, the Fed, with the help of a cheap money policy, suppressed both faith and fears. However, in September, the central bank’s optimism about the outlook for the US economy and its signal about the cessation of QE in November freed Treasury yields from the dungeon. The rates of the American debt market are clearly understated in comparison with the global business activity, and it is time for their difference, which is commonly called the Powell gap, to decrease.
Treasury yields and global business activity dynamics
Source: Nordea Markets.
Due to yet another outbreak of COVID-19, problems with supply chains and with hiring activity, the Purchasing Managers’ Indexes have been going down lately. However, most of the indicators are above 50, a mark indicating expansion, and experts are optimistic about the outlook for the US GDP. The Fed raised its forecast for economic growth in 2022 from 3.3% to 3.8%, and Decision Economics expects it to be 4.2% in the third, 6.5% in the fourth and 5.1% in the first quarter. The economy is like a compressed spring that COVID-19 prevents from straightening, but sooner or later it will happen.
In 2022, the Fed will have to deal with a very difficult task: how not to resort to aggressive monetary restrictions in the face of a booming labour market recovery and high inflation? Jerome Powell believes supply chain problems will continue into the next year, allowing PCE to remain at higher levels. The Fed chairman argues that the surge in prices is the result of limited supply amid very strong demand. This is related to economic recovery, and this process has a beginning, a middle and an end.
The central bank does not expect a new inflationary regime to emerge but admits that supply chain problems are deeper than anticipated. If they persist and lead to a further rise in inflationary expectations, the Fed will be forced to raise rates. The ECB is not going to do this at least until 2024. According to Christine Lagarde, the eurozone economy has stepped away from the edge of the abyss but has not yet to get out of the forest.
Monthly EUR/USD trading plan
Divergence in monetary policy leads to the widening of the yield differential for the US and the European bonds and contributes to the decline of EUR/USD. The pair has reached its target at 1.1615 and is heading to 1.156. Continue to adhere to the strategy of shorting the pair on pullbacks.
Price chart of EURUSD in real time mode
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