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01.07.202015:58 Forex Analysis & Reviews: Euro or Dollar: which is more likely to gain strength?

Exchange Rates 01.07.2020 analysis

Investors have recently shown great interest in the euro. It seems that they believe that Europe has managed to face the crisis against COVID-19 pandemic better than the United States or other countries of the world. Indeed, Europe is ahead with regard to the health system. Prompt and competent medical care is important here because this is the only way to quickly restart the economy.

The euro has strengthened quite well, and the rate calculated by the trade-weighted ECB index is at a 2-year peak. If this happened outside the coronavirus crisis, it would be a serious cause for concern. The eurozone is highly dependent on exports, but the current situation provokes the opposite. Strengthening the value of the euro at a time when the whole world is struggling with a pandemic, is considered as a sign of stability and strength of the eurozone economy in comparison to other countries.

So, in France and Germany, which are the locomotives of the European economy, the recovery process is proceeding at a good pace compared to the United States. Economic activity in mid-June reached 90% of the norm compared to 65% in America.

The European regulator is likely to turn a blind eye to the rising euro, at least for now. However, neither the European Union nor the ECB wants to see the rapid growth of the euro, since the second stage of the economic recovery of the bloc could be in jeopardy. Spain, Italy, Greece, including France, still hopes to save the summer tourist season, and an expensive euro for them is a hindrance.

Monetary policy

To support the economy, the ECB allocated 1.35 trillion euros to spend on the crisis. Large-scale incentives could provoke a fall in the euro, but this did not happen. This is due to the fact that other large central banks adhered to a similar strategy. Now even negative regulator rates are not such a constraining factor for the growth of the euro.

As for the Fed, an emphasis was placed on curbing the growth of the dollar. So the Fed wanted to prevent a systemic global recession. When you try to get rid of some sore, you can't do without side effects. So here, such a factor was the strengthening of other major currencies. Among them are also the British pound and Chinese yuan.

Other policy

During the recent summit, the presidents of Germany and France agreed to create a restoration fund worth 750 billion euros by the end of summer. And while countries such as Austria, Sweden, and Denmark are trying to understand where the money went, the Germans are clearly inclined towards a single economic response that will help save the euro.

Meanwhile, the six-month term of the German presidency in the European Union has started today. It is unlikely that Angela Merkel will allow him to be remembered for another failure. There are still quite a few obstacles to the recovery of the eurozone economy, and a stronger single currency should not be among them.

About the dollar

The coronavirus pandemic caused a great impact on markets, as highlighted in Jerome Powell's speech on Tuesday. The head of the Fed said that the country economy is recovering faster than predicted. However, this was just an attempt to mitigate the overall negative. Further prospects for the US economy will depend on how quickly it is possible to drown out the new outbreak of COVID-19.

It should be noted that Powell never announced a new package of financial assistance. Probably, the dollar bulls have one more chance to offer decent resistance to the bears, who are counting on a new portion of liquidity and, as a result, the devaluation of the green currency.

Meanwhile, the dollar is still also greatly affected by the epidemiological situation in the world. The increase in the number of infections in some US states is a major concern. There are fears of re-introducing quarantine measures, which will cause slower economic recovery.

Growing demand for defensive assets is also causing tensions between the US and China ass well as the EU. This could create another threat to the recovery of the global economy. In addition, the US presidential election is coming soon. The dollar index may well gain a foothold above 98.00 points.

USDX

Exchange Rates 01.07.2020 analysis

However, it is difficult to predict the dynamics of the US dollar due to many unknown factors, including the prospects for the US stock market. Despite the fact that investors tend to buy protective assets, the dollar remains aloof. It is possible that this year it will be an indicator of risk appetite.

Both the euro and the dollar now remain in the grip of multidirectional factors, which are likely to swing the EUR / USD pair for a long time, increasing volatility. This will happen for a couple or three months at least. By the end of the year, the situation could clear up. If the dollar retains the status of a defensive asset, it will be able to strengthen against the euro, which will lead the EUR / USD pair below 1.1000.

EUR / USD

Exchange Rates 01.07.2020 analysis

Natalya Andreeva,
Analytical expert of InstaForex
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