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21.10.2020 04:07 PM
Dollar's bearish sentiment may strengthen

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The upcoming major political event in the US seems to have an increasing influence on the country's political minds. Before the election, Trump decides to change his anger to mercy. First of all, he softened his position in relation to the new incentives. If earlier we saw a tendency to shift the process of agreement between congressmen to the period after the elections, now we are seeing the opposite situation. The parties are actively trying to reach a consensus on an additional aid package. Moreover, Trump announced his readiness to allocate much more money than the Democrats planned.

The news further weakened the already declining dollar. This is especially noticeable in the USD / JPY pair, which plummeted after an extremely sluggish attempt to rise from 105.3.

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The dollar index is also failing. Sellers have broken through the first target at 93.00 and are now heading towards 92.50. Both long-term and medium-term trends are directed downward, which adds confidence to the bears of the USD.

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About the growth of the euro:

The interbank market continues to see a downward trend in dollar interest rates. The three-month Libor rate updated its historical low at 0.208%. Excess liquidity in the USD remains, which will continue to contribute to the growth of the euro. The upward trend in the commodity market is also on the euro's side. Investors are actively buying energy and industrial metals. This is a boon for the single currency, as assets are historically correlated with each other.

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From a technical analysis point of view, the EUR / USD pair is returning within the range of 1.1760-1.1900. It is possible that the impulse is local and can damp. The news has already been included in the quotes. A fight could play out near the 1.1900 resistance.

Why shouldn't the pound grow?

The pound is growing not only due to the decline in the dollar but also due to internal factors. Britain and the EU have once again called on each other to compromise. A devastating Brexit ending is not beneficial to anyone, as it will exacerbate an already difficult situation in an economy undermined by the pandemic. Sterling jumped to a weekly high following the words of an EU negotiator. According to Michel Barnier, the deal is still possible.

Thus, the degree of geopolitical tension has decreased, which should have a positive effect on the pound quotes in the short term.

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Additional support for the pound on Wednesday was provided by the publication of inflation indicators for the UK. Annual inflation in the country accelerated, but not enough for the Central Bank to change its monetary policy and think about tightening policy. Quite the opposite is true. The regulator is still leaning towards new incentives. Downward economic risks are starting to materialize. The labor market is weakening, and the rate of recovery is likely to be reduced while the virus wrecks havoc around the country and the world, said the head of the Bank of England on Tuesday. All this may push the regulator to strengthen stimulus at the next meeting on November 5. This scenario will play against the pound.

The sterling rose on Wednesday, but one should not wait for further strengthening of the GBP / USD pair. There are at least three reasons: despite the positive glimpses, the Brexit deal has not been struck, the virus continues to spread which weakens the economy, and the Bank of England is about to ease monetary policy.

Natalya Andreeva,
Analytical expert of InstaForex
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