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An end to the dollar downtrend could be insight

Fri, 07/31/2020 - 19:39

Anyone following the Forex markets will know that the US dollar has been on an extended downtrend ever since global quarantine measures began to be relaxed. In many ways, this was largely a natural correction down from the dizzying heights reached by the greenback at the crisis' peak. While the dom-inant trend does seem to be overwhelming to the downside, we did see some fresh signs of life this Tuesday when the dollar made some unexpected intra-day gains against its major competitors.
The main reasons for this temporary change in fortunes are a combination of souring sentiment on Asian stocks, domestic uncertainty, and anticipation ahead of Wednesday's huge FOMC decision.

For ordinary Americans, it truly is nail-biting time. The $600 additional unemployment benefit is set to expire this Friday, and there is still no decision on what aid the US's jobless will receive going forward. However, market expectations of a stimulus package deal by the week's end helped to spur the dollar on, as rumors on Capitol Hill have it that policymakers are extremely close to securing a fresh packet of fiscal stimulus. Meanwhile, renewed interest in US Treasury bond yields provided a further boost to the buck, diverting capital flows away from the quintessential haven asset. The dollar's sharp pullback dropped gold nearly $35 from its new record high of $1981.34, with investors seemingly looking to lock in profits ahead of a return to risk assets.

Green is the new gold

Gold experienced a roller-coaster session this Tuesday after opening in the $1980 region. The famous yellow metal then went on to break its 7-day winning streak, culminating in a retracement from all-time highs. Bears are now eyeing a break below the $1900 mark. This pullback was almost exclusively due to the US dollar's rebound from two-year lows and, unless we see fresh declines in the greenback, gold may not re-test its new local maximum for some time. That said, coronavirus-related economic worries, dovish Fed policies, and the US-China trade stand-off will continue to buoy the precious metal. That said, Monday's announcement by Moderna Inc and Pfizer Inc of the launch of two 30,000-subject trials of COVID-19 vaccines that may see widespread use by the end of this year could easily lay the way for further declines in gold.

Euro and pound trading mixed

Looking to the Old Continent now: the fresh dollar-buying wave saw EUR/USD dip from levels around 1.1770. Meanwhile, GBP/USD slipped back below 1.285, before hitting 1.30 in early trading today. It would appear that the markets are still unconvinced of the likelihood of a UK-US trade deal as post-Brexit uncertainty continues to weigh on the pound despite some impressive gains today. With the dollar index dropping to a 25-month low of 93.48 during Monday's US trading hours, one couldn't help but think that the greenback looked a little oversold. While it has recovered somewhat since then, the index is still down over 3.5% quarter-to-date. What's more, its 14-day relative strength index still indicates it’s oversold. With the current trend shift in XAUUSD, further declines in the Fibre could yet be forthcoming. After all, gold is usually one step ahead of the Forex markets, and many will remember that the recent dollar sell-off was foreshadowed by gold's rise above $1800.

Yen waiting for Congress's cue

USD/JPY recovered in tandem with the greenback, with the bulls reaching 105.50 ahead of the release of US Consumer Confidence data. As is well known, the yen is correlated closely to price behaviour in US equities and rates, tending to rise in value during times of economic uncertainty. The current lack of an agreement on the next phase of fiscal stimulus in the US and the expiration of the additional $600 weekly unemployment payment has weighed on markets. However, as the crucial FOMC meeting draws nigh, it would appear that the yen bears are gaining in confidence, with the Japanese currency falling below 105 overnight. Once we have any kind of certainty on the US's economic future, this could open the door for further declines.

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