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30.11.2020 10:47 AM
EUR/USD and GBP/USD: Tighter quarantine restrictions will weaken the position of the US dollar. Persisting uncertainty over Brexit negotiations are dimming the outlook for the British pound.

Demand for the euro rose last Friday amid rumors that the US will tighten quarantine restrictions due to the persistent rise of COVID-19 infections in the country.

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Many are concerned that the recent celebration of Thanksgiving may have caused a much larger increase in COVID-19 incidence. However, according to the latest data, about 141,000 new cases were recorded on November 29, lower than the 188,000 recorded at the beginning of last week. This data is not final yet though, so a surge may be seen after 1-2 weeks.

In any case, by the time Joe Biden takes over as US President next January, coronavirus cases in the US may be much higher than December's, which will force the new president to impose stricter measures. And if the situation in the EU turns out to be much better, the US dollar may undergo even more pressure, since even without the news on COVID-19, there are many reasons why the currency will depreciate next year. The implementation of Biden's $ 2 trillion stimulus program is one example.

With regards to the issue on the recent US elections, over the weekend, federal courts rejected the appeal filed by Donald Trump against Biden's victory. It seems that it will be difficult for Trump to continue fighting to retain his seat.

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While the situation in the US is not very encouraging, many companies are beginning to revise their forecasts, expecting some growth in the global economy. The main reason for this is the news of successful vaccine trials from Pfizer, Moderna and AstraZeneca. As a result, Capital Economics expects global GDP to grow by 6.8% in 2020, not 6.0% as projected before. But by 2022, global economic growth will decline to 4.6%, against the previous forecast of 4.1%.

UBS also believes that global GDP will jump in 2021 and 2022, particularly to 6.1% (from 5.3%) and 4.9% (from 4.1%) respectively. The growth should come from higher global demand and a pickup in exports. However, such a scenario will be possible only if COVID-19 incidence drops sharply in the second half of 2021.

Although all this news has a positive impact on risky assets, there are still short-term risks remaining. For example, the threat of a rate cut by the ECB may restrain the growth of the euro in the near future, but there is a low chance that this will happen at the central bank's meeting this December. Instead, the regulator might expand its bond purchase program.

With regards to macroeconomic reports, they did not deliver much influence on the market, but they once again proved that the situation is difficult in the EU. A report published last Friday said the index of sentiment in the eurozone economy dropped significantly in November, collapsing to 87.6 points from 91.1 points in October. Understandably, the trust of service and retail companies has sagged the most, but the representatives from the manufacturing and construction sectors were still optimistic about their outlook.

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Meanwhile, the index for employment published by the Ifo Institute rose slightly in November amid a number of support programs provided by the government. According to the report, the Ifo Employment Barometer rose to 96.7 points in November after measuring 96.4 points in October.

As for the EUR/USD pair, the market is currently in the hands of the bulls, clearly shown by the breakout from 1.1960. A further upward move is expected, especially towards the highs 1.2010 and 1.2060. If the quote manages to break again above this range, the euro will rise even higher next year. But if the price returns below 1.1960, the EUR/USD pair may collapse again towards 1.1915 and 1.1880, on which the further direction of the pair will depend.

GBP/USD

The uncertainty over Brexit negotiations are making traders expect a sharp decline in the British pound. To add to that, the latest report from the CME Group indicated a bias towards demand for options that provide for a fall in the pound. However, it should be noted that although the balance is shifting towards downward risks, it is not too strong and any Brexit news may change the balance of power.

In any case, the pound will continue trading within the sideways channel, but if the bears turn out to be stronger and do not let the bulls go beyond 1.3350, the quote will decline to 1.3295, a breakout of which will push the GBP/USD pair to the lows 1.3250 and 1.3195. But if the bulls break above 1.3350, the pound will test the level 1.3395, and then attempt to climb to 1.3450 and 1.3510.

Jakub Novak,
Analytical expert of InstaForex
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