EUR/USD: Dollar tries to pull the blanket over itself

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Over the past several days, the USD index has been declining during trading in New York, and it could continue to fall if US asset managers continue to sell the national currency during the domestic sessions, says Jeff Kendrick of Standard Chartered.

"If this is the beginning of a new dollar selling trend during trading hours in the US, it could be a significant event that will signal that we are entering the middle of the dollar smile," he said.

According to the "dollar smile" theory, the US currency tends to strengthen in times of crisis, when there is a shift from risk to safety, weakens when the global economy recovers, and strengthens again when the US economy is growing faster than the rest of the world.

Uncertainty about the prospects for the US economy against the backdrop of the imminent end of the program of additional payments to unemployment benefits forced investors to abandon purchases of the dollar.

At the moment, there have been no discussions regarding a possible extension of the program. Instead, the White House is focusing on a new stimulus package that would be somewhat complementary to the current program. The pressure on the national government is expected to increase after the end of benefits surcharges, as it will be required to make a new deal that will maintain the pace of economic recovery. As a result, news from this front will become the main driver of the USD exchange rate.

In the meantime, the greenback is trying to move away from the minimum multi-month levels against other major currencies amid increasing tensions between Washington and Beijing.

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The United States gave China time until Friday to close its consulate in Houston. There is speculation that the consulate was used for espionage. The Chinese authorities said they could close the US consulate in Wuhan in response. This only worsened the already strained relations between the countries.

The United States and China have previously been in a state of conflict over issues such as coronavirus, Huawei, Hong Kong, etc. However, investors are comforted by the fact that the parties continue to adhere to the trade agreement.

However, will this state of affairs continue? When the United States imposed tariffs on Chinese goods in 2018 and 2019, stock markets plummeted briefly as China retaliated. Will this repeat itself this time? If equity markets decline, the dollar will have the opportunity to continue to rise.

The EUR/USD pair decided to take a breath after a rapid rally to 21-month highs.

"The pair touched the round 1.16 mark, but fell back. Only a clear breakdown of this barrier will allow the bulls to take the course to the next important level of 1.1635. It is assumed that the current positive mood will continue as long as the strong support at 1.1465 remains unbroken," UOB strategists said.

As for the long-term prospects, experts at Goldman Sachs expect that in the next 12 months, the euro will grow by almost 10% against the US dollar.

"The approval of the EU economic recovery fund was an important milestone for the euro," they said.

Meanwhile, Bank of America experts believe that in the coming months, the euro is likely to lose all its recent growth against the US dollar, a safe haven asset, due to a disappointing global economic recovery.

"We expect a weak recovery in the global economy after its reopening and do not expect full normalization while the virus is a threat. The EU coronavirus recovery fund is a positive step, but it is far from making a difference," BofA analysts said. According to the Bank's forecast, the EUR/USD pair will be trading at 1.08 by the end of the year.

The material has been provided by InstaForex Company - www.instaforex.com