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03.08.2020 09:42 AM
EUR/USD: don't believe the dollar's ambitions

The dollar index slightly recovered in the Asian session on Monday, continuing Friday's trends. The indicator reached 93.625 - a multi-day high, which it was at last week, on July 30. However, the first impulse wave has subsided at this level – the index has retreated again and is currently drifting around the middle of the 93rd figure.

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Let me remind you that dollar bulls were able to seize the initiative at the end of last week - firstly, not only did the five-day trading period end on Friday, but also the month, therefore, many traders rushed to take their profits on the eve of the weekend. Secondly, the dollar began to rise amid reports of a sharp increase in the number of COVID-19 infections outside the United States: the relevant information came, in particular, from Spain, Australia, Japan, Iran and India. For example, Indian authorities reported that the increase in infections in the country exceeded the 50,000 mark for the third consecutive day. Almost 3,000 infected were detected in Iran over the past day - this is the highest increase in the last month. The head of the Iranian Ministry of Health said that the situation is of concern in 25 of the 31 provinces of the country. Disappointing data also came from Spain - they also reported a surge in incidence there on Friday - in just one day the number of coronavirus cases increased by one and a half thousand. This is the highest intraday gain since the quarantine in the country eased (that is, since the end of June). The daily gain exceeded the thousandth mark for the third consecutive day. A difficult situation has developed in Australia, namely in the state of Victoria. Because of the COVID-19 outbreak, local authorities even had to impose a curfew in five-million-strong Melbourne.

The market was also concerned about the European economy, which showed a record decline in 25 years (that is, in the entire history of observations) in the second quarter. Countries such as Spain, France and Portugal have set anti-records. And although such a result was an expected event (the second quarter was the peak of the coronavirus crisis), the very fact of this statement caused a surge in anti-risk sentiment.

Such a news picture against the background of the end of the week and month allowed the dollar bulls to win back some of the lost positions on Friday. At the finish line, traders preferred the US currency or took profit in positions against the greenback, thereby providing indirect support to the currency.

On Monday, dollar bulls tried to continue what they started, but Friday's enthusiasm noticeably faded: the dollar index could not even get back to the 94th figure, reflecting the market's skeptical attitude towards the greenback.

The fact is that external problems, if I may say so, do not look so sad and frightening about US events. Despite spikes in cases in a number of countries around the world, many experts agree that these outbreaks are local, while the overall situation with COVID-19 is under control.

This is not true of the United States, where the number of deaths from coronavirus has already exceeded 150,000. According to experts at Johns Hopkins University, the epidemic is spreading "almost out of control" in almost every state in the country. The number of new cases has significantly grown in two-thirds of the states over the past week. The most difficult situation is in the southern regions of the country. More than 70,000 new cases were detected over the past seven days in Florida, 67,000 in California, more than 57,000 in Texas. Georgia, Arizona, Louisiana, Tennessee, North Carolina, Alabama, South Carolina and Illinois have reported more than 10,000 cases in the past week. At the same time, scientists and doctors warn that the situation can only get worse in cold periods of the year against the background of a possible flu epidemic. Deborah Birks, coordinator of the White House working group on coronavirus control, said today that the United States has entered a new phase of the coronavirus epidemic, when the infection has become "extremely common" in both rural and urban areas. I think any additional comments are unnecessary here.

The dollar's second problem is political. Democrats and Republicans still can't agree on the scope of additional assistance to 30 million unemployed Americans. Over the weekend, political battles continued on one of the TV channels: the head of the House of Representatives, Nancy Pelosi, and Treasury Secretary Steven Mnuchin argued with each other in absentia over the amount of new aid that the Federal government should approve.

Let me remind you that the US has stopped paying 600-dollar additional payments since July 31. Despite long negotiations, the parties were unable to agree on their future fate: the Democrats insist on extending these payments until at least the end of this year, while the White House and most Republicans want to first reduce their amount to $200 a week, and then set the amount of assistance at 70 percent of the salary that the employee received before being dismissed as a result of the pandemic.

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Key negotiators on Saturday said they had "made some progress" in the negotiations, but were unable to find a common denominator on the issue. Republicans and Democrats remain seriously at odds over the total amount of coronavirus aid, with Democratic officials proposing a three-trillion-dollar bill, while Republicans want to limit themselves to one trillion. Discussion of the parties on the fate of the package will be resumed today.

All this suggests that the dollar's growth may be corrective, short-term. Speaking directly about the EUR/USD pair, here we see that the bears failed to develop the downward momentum during the Asian session on Monday. As soon as the pair touched the middle of the 17th figure, it began to attract buyers. And although the behavior of traders is now extremely cautious, it can be assumed that sellers will find it difficult to overcome even the first support level of 1.1701 (Tenkan-sen line on the daily chart). Buying can be viewed either from current positions, waiting for the correction to finally end (it is likely that the bears will try to decline to the bottom of the 17th figure). The first target of the upward movement is 1.1800, but the main target is located slightly higher - at 1.1880, which corresponds to the upper line of the Bollinger Bands indicator on the same timeframe.

Irina Manzenko,
Analytical expert of InstaForex
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