21.05.202010:45 Forex Analysis & Reviews: Reversal: euro took the lead from the dollar

Long-term review

Exchange Rates 21.05.2020 analysis

The European currency has reached its finest hour: it has swapped places with the US currency and can now celebrate its victory. The euro took the lead, ahead of the dollar in the EUR/USD pair. According to analysts, the "European" currency will continue to grow in the near future.

A good reason for such optimism for the European currency was the initiative of Angela Merkel, Chancellor of Germany, and French President, Emmanuel Macron, to create a fund of € 500 billion. It can be recalled that this fund involves the issuance of grants, and not loans to countries in the eurozone most affected by the COVID-19 pandemic. Thanks to the formation of a financial "pillow" of € 500 billion, the European Union, according to a proverb, will kill two birds with one stone: it will not only protect the most vulnerable members, but also strengthen the common currency.

According to economists, the current state of affairs strengthens the position of the euro at times, giving it the long-awaited advantage over the dollar. MUFG Bank's currency strategists believe that in the event of an accelerated economic recovery in the eurozone, driven by the initiatives of France and Germany, the euro will win in the medium term compared to the greenback. According to MUFG Bank, the European economy will gain strength and emerge from the crisis sooner than the economies of Great Britain and the United States. Experts consider Germany to be the leader in economic recovery, which is much better than others in dealing with the devastating consequences of COVID-19. An important help in overcoming the crisis will be the creation of a new € 500 billion joint fund, which will neutralize the short-term and medium-term risks of the euro decline.

Against the background of the well-being of the European currency, the decline of the US currency is especially noticeable. Experts explain the weakening of the dollar by two reasons: increased risk appetite and the conflict over powerful cash injections into the US economy in the amount of $ 3 trillion. The recently passed bill on financial assistance to America, providing for the injection of $ 3 trillion, caused serious political resonance. It can be recalled that the House of Representatives of the US Congress approved this initiative, but it may not be held in the Senate. Earlier, the White House criticized this bill, and its further fate remains in question.

According to experts, the key monetary factors for the dynamics of the US currency are the current monetary policy of the Federal Reserve and the activity of the US Treasury in relation to borrowing. Experts see the threat to the dollar while increasing liquidity in the financial system. It can be noted that in March 2020, during the crisis of dollar liquidity due to the coronavirus pandemic, the Fed cut the rate to zero and launched a quantitative easing program (QE), which exceeded $ 100 billion a day at peak times. In addition, the high USD rate in March was supported by a liquidity deficit, and analysts emphasize that as it grows, the dollar weakens.

Specialists pay attention to the downward impulses, which were recorded in the EUR/USD pair. They are caused by the loosening of the dollar, which was inextricably followed by the European currency. According to analysts, the EUR/USD pair mainly focused on the dynamics of the US currency, who now has lost its leading position. Economists are sure that the key to the further growth of the pair is in the hands of European leaders. In the case of a positive scenario and the final approval of the initiative of the FRG and France to create a fund, the euro will benefit. The currency of the European community will be able to rise even higher, conquering the next highs.

Currently, the EUR/USD pair retains the potential for further growth to the level of 1.1000. If this bar is reached, the bulls will be the winners, who will be able to move to the next resistance level of 1.1060. On Wednesday, May 20, the single currency added 0.18%, reaching a two-week high and exceeding the $ 1.0945 mark. On Thursday morning, May 21, the EUR/USD pair moved near the range of 1.0954 - 1.0955, trying to rise higher. The pair succeeded later. Following this, the EUR/USD pair was seen trading in the range 1.0969 - 1.0971, trying to stay in the gained positions.

According to analysts, the balance in the EUR/USD pair has been slightly violated at the moment due to the rise of the "European" currency. The single currency was ahead of the dollar, which, despite its dominance, balanced the pair. Currently, demand for the euro has grown, while it has fallen for the dollar and other defensive assets, causing a disproportion in the pair. However, experts expect the balance to be restored in EUR/USD and predict the euro will enter an upward trend. According to some analysts, the peak of strengthening the euro will be in the third quarter of 2020. As a result, the euro can reach the range of 1.1200 - 1.1400 and consolidate on these highs by the end of the year.

Larisa Kolesnikova,
Analytical expert
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