Dollar sees difference. Forecast as of 30.12.2021

Victory over the pandemic, fast recovery of global GDP. Does that ring any bells? It does: the same sentiment took over the market at the beginning of 2021, and Bloomberg experts predicted the EURUSD‘s growth. As a result, the pair dropped by over 7%. What can we expect of it in 2022? Let’s check it and make a trading plan.

Monthly fundamental forecast for the dollar

The USD fans felt fooled as the Santa Claus rally resumed in the US stock market. Inspired by low hospitalization levels and death tolls with Omicron amid record-high infection rates worldwide, investors bought US stocks like hotcakes. Thus, the S&P 500 had its 70th record close in 2021, while the EURUSD bulls tested the upper limit of the consolidation rate at 1.1225 – 1.1355. 

Since fears of the new coronavirus variant are fading, the microenvironment at the borderline of 2021 and 2022 starts looking like what was at the beginning of 2021. Back then, global stock indexes and treasuries were growing against the background of optimism about vaccines and a victory over the pandemic. Investors believed global GDP would recover fast, so the greenback felt ill at ease.

Forecasts for the EURUSD were bullish. Bulls had reasons for that, such as the USD’s weaker purchasing power amid huge monetary stimuli or double balance sheet/trade deficit. As a result, the US foreign trade negative balance did have its record slump in November, but the dollar strengthened 7% against the euro at year-end.

US trade balance dynamics

The Fed’s cheap liquidity amid GDP’s fast recovery and growth of corporate profits allowed the S&P 500 to gain over 27%, drove capital to the US stock market, and helped the USD index have its best rally since 2015. Bloomberg’s forecasts for the EURUSD didn’t come true, so could their bearish assessment of the pair’s prospects in 2022 be questioned?

True, safe-haven assets, including the US dollar, will be seriously affected if the world’s economy and stock indexes soar after COVID-19 becomes a kind of seasonal flu, thanks to Omicron. But in fact, the current microenvironment has several significant differences from the year-ago situation when Wall Street Journal predicted inflation at 1.3-4.3% at the end of 2021, and the Fed expected with a probability of 70% that prices would be in the range of 1.5-3.3%. Such estimates let us believe the US central bank would remain patient, but in fact, PCE inflation rose to 5.7%, and CPI inflation rose to 6.8%. The Fed’s intention to handle inflation by raising the rate is now obvious.

Monthly trading plan for EURUSD

Besides that, US GDP growth rates are getting back to normal and corporate profits are slowing down. Considering all those factors, I doubt the S&P 500 rally in 2022 will be as fast as in 2021. So, the EURUSD‘s corrective potential is limited. I still think that the pair’s growth to 1.1455 should be used for selling even if a breakout above 1.1355 occurs. The euro’s failure to break out the upper limit of the consolidation range at 1.1225 – 1.1355 indicates bears’ strength.

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