Greenback is to face a storm. Forecast as of 26.07.2021


Dollar is to face a storm. Forecast as of 26.07.20212021-07-26 2021-07-26 Dmitri Demidenkologo2021-07-26 2021-07-26 Dollar is to face a storm. Forecast as of 26.07.2021Dmitri Demidenkologo

This week investors expect the publications of the GDP and inflation data in the USA and the euro area, the Fed meeting, and the IMF forecasts. The last week of July is busy in terms of economic events, so increased EURUSD volatility is expected. Let us discuss the Forex outlook and make up a trading plan.

Weekly US dollar fundamental forecast

Markets are convinced that the delta variant of COVID-19 will not hinder the US economic recovery. However, some investors prefer to be cautious. According to BofA, net purchases of bonds by global hedge funds increased by $8.4 billion in the week ended July 21. Among stock, the most demanded were technology and healthcare. Reflation trade seems to be much over and needs to be reversed, so the Fed has a reason to suspend the tapering of the monetary stimulus.

According to Wall Street Journal forecasts, the US GDP was up by 8.5% in the second quarter and exceeded $19.2 trillion recorded in late 2019. The OECD believes that at the end of 2022, the US economy will be even larger than it could have been without a pandemic due to the fiscal stimulus. However, the US economic data have been rather disappointing recently, which is reflected in the decline of the economic surprise index and lower Treasury yields.

Dynamics of economic surprise index and Treasury yield

Source: Citigroup

Another evidence of the US economic downturn is the PMI data. The composite purchasing managers index fell short of the forecast of 63.7 for the second consecutive month, declining to 59.7 in July, although it remains historically high. In the euro area, conversely, the PMI increased to 60.6, up from the previous 59.6. This has been the best performance in 2021, preventing the EURUSD from falling below 1.1755. I think investors should not be confused by such positive data. First, most of the success is related to the services sector, while the manufacturing sector is slowing down. Second, business expectations for the year ahead dipped to a five-month low, down from an all-time high in June

Dynamics of euro-area PMI

Source: Financial Times

The Delta variant and economic problems allow the ECB to maintain the monetary stimulus. Likewise, the same problems could increase the number of FOMC doves. The latter claim that the USA is far behind full employment, and the inflation surge should be temporary. Furthermore, new strains of COVID-19 increase uncertainty.

It could seem that the US dollar should strengthen amid a busy economic calendar this week, but things are not that simple. The talks about tapering the US QE, the GDP rise to 8.5%, and continuous PCE rally can well encourage the EURUSD bears. Nonetheless, the Fed has reasons to be patient, and the euro-area economy features quite an improvement.

Weekly EURUSD trading plan

This week is going to be busy in terms of economic events, and the EURUSD is likely to jump up and down. As long as the euro is below $1.1825, bears control the market. The price could break out the support at 1.1755 and continue falling. If the euro goes up to $1.1825, it could be further corrected up to $1.188. In this case, after short-term purchases, it will be relevant to enter short trades on the price rebound from the resistance levels.

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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