Last Friday, the USD index fell, ignoring a strong report on the labor market. This made investors think about whether the US currency hit local highs, followed by a weakening of the greenback and the strengthening of the euro, pound sterling and other currencies.
From a fundamental point of view, the "greenback" retains its attractiveness, since the United States is ahead of the rest of the country in terms of economic growth, while the Fed has a more aggressive policy than other central banks. From a technical point of view, the euro and the Australian dollar plunged to multi-year lows, which means closing short positions in these currencies and their growth in the future.
However, financial markets received an unexpected blow during the weekend.
On the eve of the next round of US-Chinese trade, Donald Trump, the head of the White House, announced an increase in duties on goods from China this Friday, arguing that the negotiation process is progressing too slowly and Beijing is trying to revise the agreements already reached.
The foreign exchange market reacted to this by lowering commodity currencies and strengthening the position of the yen, which is traditionally used as a "safe haven". At one point, the USD/JPY pair fell to 110.3.
"Trump provoked a panic in the markets, threatening China with a new increase in duties. Of course, this factor has become the main engine of instinctive transfer of funds to the most reliable assets by traders," said analysts at Mizuho Bank.
In the meantime, the EUR/USD pair has rather discreetly reacted to concerns about the escalation of trade tensions between the United States and China.
On the one hand, the escalation of the trade conflict between Washington and Beijing may slow down the recovery of the Chinese and European economies and will also contribute to the continuation of the EUR/USD peak. On the other hand, this will remove, albeit temporarily, from the agenda the possibility of such an exacerbation of the US-EU line, since it is unlikely for the United States to risk putting pressure on all trading partners at once.
According to experts, the oversold and overbought dollar also speaks in favor of the euro's stability. According to the Commodity Futures Trading Commission (CFTC), long positions on the greenback have reached highest values over the past few years. According to TD Securities, the dollar is now overvalued by about 3.5% against the currencies of other developed countries.
Despite the obvious technical strength of the dollar, as well as the fundamental factors in favor of its growth, analysts advise caution to those investors who remain in the "shorts" for EUR/USD. An extreme overselling of the euro will be felt short-squeezed at the first significant positive news, which may be, in particular, the progress in the trade negotiations between Washington and Beijing.
It is assumed that if, in the near future, the US administration, frightened by the correction of the S&P 500 index, starts to calm the markets, then the bulls on EUR/USD will be able to gain a foothold in the trading range of 1.12-1.15.
