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28.05.2020 09:38 AM
Weakening dollar will only strengthen in the future (continuation of a local decline in USD/CAD pair and the growth of EUR/USD pair after a slight correction are expected)

It seems that the optimism associated with the expectations of a revival of the American economy and other leading world economies outweighs the negative generated by the aggravation of relations between America and China.

On Wednesday, stock markets were already starting to pull back in the wake of new reports of an escalation of the crisis between Washington and Beijing, which is associated with US intervention in the political situation in Hong Kong. This happened in the wake of fears that it would be the root cause of a more open clash between countries and could serve as a prologue to more serious negative consequences. Nevertheless, the growth of expectations of the beginning of a rapid recovery of the American economy in the second half of this year returned everything to its usual course. The channel of demand for stocks of companies and the weakening of the dollar.

If we pay attention to the main US stock indices, they continue to confidently approach the winter pre-pandemic local maximums. And all this happened despite the fall in crude oil prices, which just reacted violently to the Hong Kong events.

On the other hand, a fall in crude oil prices and an escalation of the US-China crisis did not lead to a drop in commodity currencies in the currency market. This indicates that so far the markets do not perceive the growth of tension as critical and believe that it may not strengthen until a truly critical moment.

In our opinion, a significant event took place on Wednesday - the euro/dollar pair, which has consolidated in a wide range of 1.0770-1.0990 since the end of March, has finally broken out of it. The reason for this was the clarification of measures to help the eurozone economy, despite some contradictions between the countries of the so-called "north", which is headed by Germany, and the "south", where Italy plays the main role. In our opinion, this certainty amid lifting quarantine measures by Europe may become a prologue for the further growth of the pair.

Earlier, we repeatedly pointed out that the beginning of the exit of economically strong countries from quarantines will cause a revival of their national economies and lead to an increase in exchange rates of currencies traded against the dollar. The growing demand for risky assets in the world will encourage investors to exit the dollar as a safe haven in critical situations which, in fact, is already happening. This reason, against the backdrop of significantly wider incentive measures from the US Treasury and the Fed, will weaken the dollar in the long run. And, if relations between Washington and Beijing still do not deteriorate significantly and there is no second wave of a pandemic, and we are inclined towards this scenario, then the weakening dollar will only strengthen.

Forecast of the day:

EUR/USD pair is trading above a strong resistance level of 1.0990. The pair may adjust to this level, but if it persists, we should expect resumption of growth to the level of 1.1035.

USD/CAD pair is consolidating at the level of 1.3760. We expect the resumption of its decline to the level of 1.3620.

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Pati Gani,
Analytical expert of InstaForex
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