US dollar price forecast 31 August 2021 | EURUSD Fundamental analysis
The expansion of the euro-area and Chinese economies, growth of the global risk appetite and slow normalization of the Fed’s monetary policy build a foundation for the EURUSD rally. Will the euro downtrend reverse soon? Let us discuss the Forex outlook and make up a trading plan.
Weekly US dollar fundamental forecast
Life changes. When the US stock indexes and oil grow in sync, the Treasury yields go down, and investors ignore China’s weak economic data, the EURUSD bears are discouraged. The S&P 500 reached its 53rd all-time high because of the rally in tech stocks, while cyclical stocks, whose price is affected by macroeconomic or systematic changes in the overall economy, were sold off. Furthermore, the number of hospitalizations due to COVID-19 is growing in the USA. The Brent and the WTI rallies are mostly driven by hurricane Ida. However, markets are optimistic, pressing down safe-haven assets.
The euro is supported by several factors. 67% of adults have been vaccinated in the EU and 63% in the USA; the number of coronavirus cases in the euro area is declining. Germany’s consumer prices soared to 3.4% in August, the highest level since 2008, in Spain – up to 3.3%. The euro-area CPI should go up to 2.7%-2.8%, which will be the fastest growth of the indicator in several decades.
Dynamics of European inflation
While the ECB considers the acceleration in inflation to be temporary, continuous supply problems force companies to raise prices. This could cause the long-term nature of the CPI growth and push the central bank to normalize monetary policy. The governor of the Bank of France, François Villeroy de Galhau, has already talked about the need to reduce monthly asset purchases under the PEPP. He stressed that this is not about reducing QE, as the Fed intends to do, but about adjusting the program. Previously, the ECB bought more, and now favourable financing conditions allow the central bank to reduce its activity in the debt market.
Dynamics of ECB asset purchases
I am concerned about two things. First, despite the dovish tone of the Fed’s officials, the derivatives market has reduced the likelihood of a federal funds rate hike in December 2022 from 69% before Jerome Powell’s speech to 54%.
Second, investors have ignored a weak report on China’s PMIs. China’s manufacturing PMI has been down in August, from 50.4 to 50.1, services PMI is below the critical level of 50, which signals an economic downturn. Investors believe the problems in the services sector are temporary, resulted from the COVID-19 outbreak. Markets expect the PBoC to react to the economic downturn and resort to new monetary stimulus.
Weekly EURUSD trading plan
If the economies of the euro area and China feature a greater expansion, the US will lose its exclusivity. The Fed’s slow monetary normalization will not support the US dollar as it did in mid-summer. Does it mean that the EURUSD downtrend is broken? I still have doubts. Therefore, I suggest expecting the US jobs report. Meanwhile, if the euro consolidates above $1.18, it could continue growing towards $1.184 and $1.188.
Price chart of EURUSD in real time mode
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