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02.12.2020 03:23 PM
EUR/USD. Euro rises amid strong statistics on Europe. Dollar declines

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On Tuesday, the euro not only became the best player of the day but also reached its highest values against the US dollar since May 2018, rising above $1.20.

In a matter of seconds, the EUR/USD pair jumped more than 20 pips and traded almost 50 pips higher in less than an hour. The next significant resistance level for the pair is the September 2017 high at 1.2090.

The single currency was supported by stronger-than-expected statistics on Europe.

Germany reported a decrease in the number of unemployed in the country in November by 39,000 against the forecast of growth by 9,000. The index of business activity in the manufacturing sector of the Eurozone for November was revised upwards - from 53.6 to 53.8 points.

Meanwhile, the quarantine restrictions imposed in the EU last month appear to be paying off as there are signs that the COVID-19 outbreak in some parts of Europe is slowing down. In contrast, the US is preparing for the worst, anticipating a surge in coronavirus cases after Thanksgiving.

The sharp rise in the euro was also due to the weakening of the greenback on a wide front.

The USD index fell to its lowest level in more than 2.5 years (near 91 points) amid expectations of increased monetary stimulus in the United States.

US Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi held talks for the first time since the November 3 elections to stimulate the national economy.

At the same time, a bipartisan congressional group proposed a new $900 billion stimulus package.

Senate Majority Leader Mitch McConnell, in turn, said that he was considering another version of an emergency package to help the American economy. He stressed that Congress should include a new stimulus package in the $ 1.4 trillion spending bill that needs to be passed to prevent a government shutdown in the midst of a pandemic.

Additional pressure on the dollar came from a weak report from the Institute for Supply Management (ISM). According to data released on Tuesday, the purchasing managers' index for the US manufacturing sector in November fell to 57.5 points from 59.3 points recorded in October.

Although the euro became the hero on Tuesday, gaining 1.2% in weight at once, this leadership is unlikely to please the ECB, whose representatives previously pointed to the negative effects of the growth of the euro. According to them, this harms the EU's export potential and creates deflationary risks in the region.

Next week the ECB will hold its next meeting and some investors fear that the regulator may take decisive measures against the rapid growth of the euro.

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"The ECB could comment on the growth of the single currency, but we believe that it will be difficult for the bank to stop the strengthening of the euro. It is difficult to refrain from buying EUR at a time when the eurozone is experiencing a surplus in trade and people are selling the dollar everywhere, "said strategists at Daiwa Securities.

Improved risk appetite and the rise in the US stock market also played an important role in the recent rally in the euro.

Although the pandemic is not yet on the decline, US stock indices have not stopped breaking records. The optimism that fueled the November upsurge did not die out even with the onset of the calendar winter.

By all appearances, market participants are betting that interest rates in the United States will remain low for a long time, while effective vaccines against COVID-19 will kick-start the recovery of the American economy.

If stocks continue to rise, so will the single currency. However, it should be borne in mind that there is a high likelihood of a deterioration in the epidemiological situation in the United States before the start of mass vaccinations, which may affect stocks. Also, the market may be overbought. At least that was the case a year ago, to which the market responded with a January 2020 sell-off.

Also of concern is the fact that the White House, Senate, and House of Representatives are still unable to agree on a stimulus package for many sectors of the American economy that are suffering from the pandemic. The lack of additional budgetary support for local consumers will also have a significant impact on the retail sector.

It is assumed that the combination of these factors could force the Fed to further soften its policy in anticipation of the moment when vaccines will save the national economy.

"Judging by the current bearish market positioning for the USD, general optimism, and even analysts' comments, many believe that the Fed is ready for decisive mitigating steps at the December 16 meeting. We doubt this, however, given the rather generous funding conditions and record highs in equities. In addition, fiscal policy has come to the fore, and monetary policy may not be the medicine the economy needs," said experts at Saxo Bank.

They added that "If the market is now really counting on strong easing in the near future from the FRS, then in case of disappointment there is a threat of a decline in risk sentiment in the near future. In addition, if one of the last two Senate seats to be contested in Georgia is occupied by a Republican, then investors may wonder about the risk of a political stalemate in the United States leading to the abandonment of large fiscal stimulus next year. This will spoil the usually favorable market season and cause a decrease in risk sentiment."

Viktor Isakov,
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