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28.05.2020 09:48 AM
EUR/USD: political move or new reversal?

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The currencies, which drives the global economy, namely European and American, unexpectedly faced a sharp change in market sentiment. Experts believe that this is how the market is trying to win back a new wave of political mess associated with tensions between the US and China.

A reversal in relation to the EUR/USD pair contributed to the resumption of the upward trend of both currencies. Experts note the prevalence of anti-risk sentiment in the market, which provides support to the "American" currency, who had previously declined a little. However, to date, analysts emphasize that the dollar has managed to regain lost ground. The dollar is still awake and ready to withstand external pressure.

According to experts, on Wednesday evening, May 27, when a sharp reversal in the current trends of the EUR/USD pair was recorded, the market played out political and economic negative aspects. First of all, this applies to the growing tension in relations between Washington and Beijing. Earlier, officials of the United States and China filed a number of charges against each other. They mainly revolve around two key factors: the refusal of China to investigate the spread of the COVID-19 pandemic, and the adoption of the national security bill in Hong Kong, developed by the PRC. The latter factor has provoked serious conflict between the States: Washington is ready to apply the harshest measures against Beijing, up to new sanctions.

The current situation is shaking the position of the American currency, but in general, it remains stable. In the midst of the COVID-19 pandemic, and now that quarantine measures are loosening, USD is being used as the main protective instrument. According to analysts, the dollar is sensitive to the growth and decline of anti-risk sentiment. Currently, it has caught a wave of recovery, consolidating on the upward reversal of market sentiment.

Nevertheless, experts warn that bearish risks for the US currency are still relevant. While risky assets are at the peak of demand, the dollar is on horseback, but things could change if relations between Washington and Beijing deteriorate. The notorious Hong Kong issue has become a stumbling block at the moment, while the long-running trade conflict has not lost its relevance. According to Mike Pompeo, US Secretary of State, any decision by the Chinese authorities that adversely affects Hong Kong's autonomy will lead to a reassessment of relations with China. Experts fear that the lack of compromise between the two superpowers will hit risky instruments, but the demand for safe haven assets, in particular the dollar, will only increase.

The US currency was helped immeasurably by relatively positive macroeconomic statistics, which improved slightly for the first time since the beginning of the pandemic. This caused a slight surge in demand for the dollar by the end of Wednesday. The reasons were data on an increase in sales of new homes in the United States (by 0.6%) and an increase in consumer confidence in the country. According to the estimates of the Conference Board research company, the indicator of consumer confidence rose sharply this month after lifting restrictive measures and the gradual withdrawal of the United States from quarantine. According to analysts, this index in May 2020 increased to 86.6 points compared with 85.7 points recorded in April. However, most Americans are in no hurry to increase consumption, fearing the unpredictable consequences of COVID-19 and another outbreak of coronavirus infection.

According to experts, a gradual increase in consumer confidence in the United States after the minimum values of April this year indicates the imminent recovery of the national economy. Experts say a similar statement holds true for the eurozone economy,

The European currency has now interrupted the downward trend and is trying to change negativity to positivity. Basically, these attempts are successful, analysts say. The Franco-German initiative to create a pan-European aid fund of € 500 billion and a number of measures proposed by the European Commission to save the economies of the eurozone most affected by the pandemic provide strong support to the "European" currency. It can be recalled the commission's initiative provides for the provision of an assistance package in the amount of € 1.85 trillion ($ 2.04 trillion).

In the wake of the proposed measures, the European currency has gained a second wind. On Wednesday, May 27, the euro rose to $1.1031, but later declined to $1.1017. The EUR/USD pair met at this level in the morning of Thursday, May 28. Afterwards, the classic pair declined to lower values. Currently, the EUR/USD pair is trading around the range of 1.1019 - 1.1020. According to analysts, there was a pullback to yesterday's indicators in the pair.

It can be noted that on Wednesday, the EUR/USD pair reached the most important resistance level of 1.1020. According to experts, the departure of the pair below this level will be the beginning of a long-term negative trend for the pair. In case of subsidence below the support level of 1.0980, the long-term negative trend of the EUR/USD pair will resume. The impulse of such a decline could be investors' concerns about the global economy and the escalation of the US-PRC trade conflict. In the case of the implementation of such a scenario, US stock indices will drop and dollar's positions will strengthen. According to analysts, this will lead to another wave of decline in the EUR/USD pair. In such a situation, American and European currencies will experience the "charms" of imbalance again, disorienting the market. Experts expect that the current reversal of market sentiment will benefit key currencies, and the EUR/USD pair will remain stable.

Larisa Kolesnikova,
Analytical expert of InstaForex
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