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03.08.2020 01:39 PM
EUR/USD to rise from ashes in August?

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July has been a rather difficult month for the greenback. The US dollar fell sharply against all major currencies and reached months-long, and in some cases, years-long lows.

Last month, the USD index sank by more than 4%, showing its worst monthly results since September 2010.

Experts give a number of reasons why demand for the greenback has decreased. They include a poor epidemiological situation in the United States, a drop in the yield of US government bonds, and the expiration of the unemployment benefit program.

In addition, last Thursday, US President Donald Trump offered to delay November's presidential election and put the US dollar under additional pressure. The representatives of the Republican Party quickly rejected the idea however investors feared that the current US president would find another way to postpone the election.

Over the past few days, the greenback has managed to somewhat regain its positions against the major counterparts. Anyway, the US dollar still remains under pressure due to concerns about a slowdown in the US economic recovery.

At the end of July, several financial assistance programs in the United States expired, including federal unemployment benefits. However, the American authorities still cannot come to terms on new support measures. The next round of talks between Republicans and Democrats is to take place today. Unfortunately, the longer they negotiate, the harder it hits the US national economy.

On Friday, the EUR / USD pair crossed the 1.19 mark, but failed to hold the conquered positions and retreated from the two-year highs.

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Data released last week showed that the eurozone economy slowed slightly more than expected in the second quarter. France and Italy's GDP reports turned out to be better than expected, while the statistics from Spain did not come in line with economists' expectations. Anyway, the eurozone has its large-scale economic recovery fund. It is also worth noting the local nature of new COVID-19 outbreaks in countries of the Old World. These factors suggest that the European economy will recover faster than the American one.

Apart from the revised eurozone business activity for July, no other major regional data is set for release in the coming week. It means that the dynamics of the EUR/USD pair will depend on statistics from the United States and the demand for risk assets.

The main event of the week will be the publication of the US nonfarm payrolls report.

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According to preliminary estimates, the US economy created only 2 million jobs in July compared to 4.8 million in the previous month. Most US states affected by the recent coronavirus outbreak tightened measures only in mid-July. Thus, market participants are waiting to see how this will affect the results of the report. Strong US employment growth is expected to support the greenback. However, if the release falls short of expectations, investors are likely to see it as a negative factor.

Analysts at MUFG Bank said that the common currency hit a speed bump on some technical signs of being overbought in the near-term, and with speculators' long positions hitting a record level. "But the dollar's decline is likely to continue. Real US interest rates are declining even as the country is running a big current account deficit, a situation we hadn't had for a long time."

ING specialists adhere to a similar point of view.

"The factors that have seen DXY (the dollar index) fall 10% from its spike high in March are still in place and we expect a 'sell the rally' mentality to develop through August," ING strategists said.

However, there are those who think otherwise.

"There's usually something that trips global markets up in August, and this year might not be different given the growing list of market risks," said Viraj Patel, global FX and macro strategist at Arkera.

"Given the way that risky assets have rallied in recent months, this rising geopolitical threat could lead to a squaring off in positions and potential reversal of recent trends that would help the dollar recoup its recent losses," he added.

Viktor Isakov,
Analytical expert of InstaForex
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