The widening foreign trade deficit amid the increase in imports usually means the economy’s overheating. However, the Fed and the US administration seem to be unwilling to manage the situation. In February, the US trade deficit reached a record high of $71.1 billion. Nevertheless, Joe Biden continues to put forward the idea of a new $ 2.3 trillion stimulus, and the Fed believes its current interest rates are at the right place. Such a position of the authorities calms down financial markets, allowing the S&P 500 to hit the new all-time highs. However, it may not support the EURUSD bulls.
Dynamics of US trade balance
Source: Wall Street Journal
The widening of the US twin deficit was one of the main arguments of the bearish USD forecasts for 2021. Despite the greenback's successful start, some banks and investment companies still hold a bearish outlook for the dollar. For example, Deutsche Bank still believes that the euro will rise to $1.25 by June and to $1.3 by the end of December. Despite the short-term bearish sentiment, Goldman Sachs expects EURUSD to rally to 1.21 and 1.28 over the next 3 and 12 months. Even Citi, which surprised Forex analysts by its forecast suggesting the greenback should weaken by 20%, doesn’t abandon the former trading ideas, claiming that the USD long-term outlook remains bearish.
On the other hand, BofA Merrill Lynch bets on the growth gap between the USA and the euro area and expects the euro-dollar to go down to 1.15 by December. Commonwealth Bank of Australia suggests that the EURUSD should soon reach level 1.17 as the number of new coronavirus cases is growing in Europe, and the EU is lagging behind the USA in terms of vaccination rate.
Some analysts say the further euro-dollar trend depends on the Fed’s reaction to US inflation growth. Based on the minutes of the FOMC March meeting, the US central bank believes that the risk of high inflation is almost equal to the risk of low inflation. Several Committee members noted that supply disruptions could lead to higher consumer prices than expected. Others said that the factors that had hampered PCE in the past would soon create new pressures on inflation.
I must say the S&P 500 would hardly have broken through its all-time high, and the EURUSD would not have moved above 1.19 if it had not been for the US bond market stabilization.
Dynamics of Treasury yields
Source: Bloomberg
Yes, the US bond yields have slowed down, but the new growth driver will be the softening of Joe Biden’s tax plan. Currently, the White House offers a tax hike from 21% to 28%. However, according to Reuters polls, most corporations and government representatives believe there will be reached a compromise of 25%.
Weekly EURUSD trading plan
The EURUSD bulls failed to consolidate the price above 1.19, which means their weakness. The euro still looks vulnerable. If the Treasury yields resume the rally, the euro will move to the lower border of the consolidation range of $1.17- $1.195. Sales on the price rise have been profitable so far.
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