The future consists of what we already know and what we have yet to learn. Hardly anyone was surprised by the increased US GDP forecasts for 2021 from 5.1% to 6.4%. However, the IMF upgraded the growth projections for China, paying for the economic stimulus, and the locked-down euro-area, which has become a pleasant surprise for the EURUSD bulls. They took advantage of a halt in the Treasury yields rally and pushed the pair price above the middle of figure 18.
Things are not as bad as they seemed before. According to the IMF, the recent recession won’t leave as severe consequences as the previous one due to the massive incentives. By 2024, the OECD countries will produce only 1% less than predicted before the pandemic. For comparison, after the crisis of 2008-2009, the gap between the expected and actual growth was 10%. The United States, due to the large-scale monetary and fiscal stimulus, will manage the recession fallout with little or no loss and help other countries. However, over the next five years, the global GDP driver will be China, not the USA.
IMF projections
Source: Financial Times
Both factors, including the US assistance to the export-led economies and China’s leadership, are favorable for the euro. Furthermore, there are unconventional views on fiscal policy, which will support the EURUSD bulls. According to UBS, Joe Biden's $1.9 trillion aid package is not more significant for the United States than the €750 billion Recovery Fund for Europe. In fact, most of the EU stimulus will come in 2021, while in the USA, the new packages will simply replace the previous ones. The bank estimates the impact of the program adopted by Congress at +0.5 % to US GDP in 2021, while European stimulus will add 1% to the euro-area GDP in the same period.
By and large, the EU efforts to create the European common bond market, China's financial openness and the growing US twin deficit are bearish factors for the USD index. The greenback must have been growing too fast in March, and investors realize this fact in April. A case in point is the decline in the Treasury yields and the lower chance of the federal funds rate hike in response to the robust US PMI and employment data.
Market expectations for the Fed rate hike
Source: Bloomberg
Currently, the derivatives market is betting on a Fed rate hike in late 2022, and a further 75-bps increase by early 2024. Nevertheless, the Fed members express the willingness to allow the US economy to overheat. The Fed does not try to clamp down on the growth of US bond yields, as it considers it to be fundamentally justified. As long as financial conditions, according to Oxford Economics, are close to 20-year lows, the central bank won’t take active steps.
Monthly EURUSD trading plan
I believe there appear reasons for the EURUSD rally start which will resume the euro uptrend. This fact suggests the trading strategy of buying the euro-dollar on the corrections. On the other hand, the euro-area economic situation will hardly improve soon. Therefore, the euro tendency to consolidate in the range of $1.17-$1.195 makes it profitable to sell the EURUSD on the price growth to the upper border of the range.
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