26.08.202014:39 Forex Analysis & Reviews: EUR / USD: dollar to continue losing ground unless COVID cases drop

Long-term review

Exchange Rates 26.08.2020 analysis

Recently, many experts looked into the possibility of the greenback losing its position as the world's main reserve currency. The presence of such opinions, along with unprecedented stimulus measures from the Fed, expressed in a policy of close to zero interest rates and a willingness to unlimited QE, led to an increase in the number of short positions in USD.

Although it is hardly worth expecting that the greenback will easily give up its remarkable position, recent events in the foreign exchange market confirm that the greenback has been overvalued for a long time.

Strategists at MUFG said, "We can say that we are in the long-term correction of the excessive strength of the dollar."

On Tuesday, the US dollar came under pressure as consumer confidence in the United States fell to its lowest level since May 2014.

In August, the consumer confidence index from the Conference Board dipped to 84.8 points against the forecast of 93 points. At the same time, both the assessment of the current situation in business and the labor market and expectations worsened.

This seems to mean that despite the decline in the mortality rate in COVID-19 and the flattening of the incidence curve in some regions of the country, consumers believe that the national economy will remain depressed for the foreseeable future, including persistently high unemployment.

An unexpected dip in consumer sentiment in the US and an improvement in business sentiment in Germany helped EUR / USD surpass the 1.18 mark again.

The data published the day before showed that, in August, the index of the business climate in Germany from IFO rose to 92.6 points from 90.4 points recorded in July.

Exchange Rates 26.08.2020 analysis

Meanwhile, the number of coronavirus cases in the EU continues to rise, particularly in Spain. However, the European authorities are still reluctant to introduce new restrictions, preferring to do so at the local level.

During the summer months, the greenback was actively losing ground against the euro due to the daily increase in the number of COVID-19 cases in the US, while Europe eased quarantine restrictions.

Improving the epidemiological situation in America may somehow return some of the faith in the dollar.

The USD is currently struggling to hold above 93 ahead of the speech of the Fed Chairman Jerome Powell at the annual Jackson Hole Symposium. Market participants are waiting for clues from Powell about the further steps of the regulator.

According to Danske Bank, "Minutes from the July FOMC meeting showed that the Fed is trying to find a balance between high macroeconomic uncertainty and improved market conditions. Further policy of the Federal Reserve will depend on whether global demand continues to improve, and whether we get another portion of the fiscal stimulus in the United States."

The main question now is whether the Fed will change its attitude towards the inflation target, focusing on the average value of the indicator. In this case, the regulator will allow inflation to exceed the 2% target. However, it will not raise interest rates.

Medium inflation targeting promises to lower the USD rate. So far, the dollar continues to cut losses, including against the euro.

"Key support for EUR / USD is located at 1.1710, and more important - at the August low of 1.1697. Only its breakout will confirm the formation of the top and mark a more important downward reversal towards the 1.1652 support (38.2% Fibonacci retracement of the rally since late June). If over time it will be broken, then the levels 1.1618 and 1.1476 will come into play, " Credit Suisse said.

"Meanwhile, a rise above 1.1819 would target 1.1847 again, and a break of 1.1883 would neutralize the bearish outlook and introduce resistance at 1.1949-1.1953," they added.

Viktor Isakov,
Analytical expert
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