21.07.202012:37 Forex Analysis & Reviews: Dollar's bearish phase opens opportunity for euro and pound

Since mid-2011, the USD index has been showing an upward trend, but now, having begun an important correction, it is on the verge of breaking this trend.

The monthly chart of the USD Index shows that the greenback has stopped again at the 33-year trendline. This line has proven its enormous resistance many times since 1987.

The only exception was in 1999 when this resistance was resolutely overcome. Then the USD index rose quickly, but this growth turned out to be final and subsequently marked the beginning of a long bearish market. When the index broke the aforementioned trend line, the decline accelerated: the dollar lost 20% in weight in less than two years. By the end of the bearish market in 2009, the USD index sank 40%.

As for the current picture, a decline in the index below 95 points will complete the formation of a rounded top in the area of significant resistance and provoke a fall by at least 10%. Such a decline will turn all moving averages down, thereby confirming the trend change in the bearish direction.

Why might the dollar start a bearish phase? It is possible that global investors will lose faith in the USD if the US authorities fail to bring the coronavirus pandemic under control. Unlike the United States, most developed countries have already flattened their COVID-19 incidence curves. The economies of these countries are likely to recover earlier than that of the US. Divergence in economic growth may lead to a shift in investor preferences in favor of other currencies such as the euro and pound.

After four days of discussions, EU leaders were finally able to reach a consensus on a regional economic recovery fund.

The fund will amount to € 750 billion, and it will be formed by both subsidies and loans, in the ratio of 390 and 360 billion euros, respectively.

German Chancellor Angela Merkel said that the summit participants managed to achieve a good result.

However, the main currency pair reacted to this news with a fall - from the 1.1460 area to the 1.1430 area. Apparently, such an outcome was already included in the quotes, and market participants implemented the strategy "buy on rumors, sell on facts".

Another factor in favor of the EUR / USD decline was the inability of the "bulls" to break through the important resistance in the 1.1495-1.1500 area. However, buyers will remain in control as long as the pair trades above 1.1420. This level provided support to EUR / USD the day before and is now the key one. Further support lies at 1.1400 and 1.1370.

"The euro can build on its recent gains by maintaining optimism about a fiscal union in the EU and a sustainable economic recovery in the region. Widespread dollar weakness will also contribute to this, "strategists at Danske Bank said.

They revised their one- and three-month forecasts for the EUR / USD pair upward - from 1.15 to 1.16.

The GBP / USD pair ended Monday trading with good growth which continued on Tuesday. However, this movement is mainly a result of the weakness of the dollar and the disappointment of the "bears", which failed to break through the support around the 25th figure. However, it is not excluded that on the eve of the release of fresh statistics on the UK, the bulls may take a break. Industrial orders will be released on Thursday, followed by reports on retail sales and business activity in the country on Friday.

Citigroup experts believe that in 2020-2021 the United Kingdom may lag behind most developed countries in terms of economic recovery. However, in the United States, according to experts, the prospects for economic growth in light of the spread of COVID-19 look even less optimistic.

"In the short term, the British currency looks vulnerable to new bouts of weakness, but the return of the pound to levels near $ 1.24 should be viewed as a buying opportunity with the expectation of a new stage of optimism about Brexit and the strengthening of the sterling to $ 1.27 in the three months." - said strategists at Citigroup.

They adhere to the outlook for GBP / USD for the fourth quarter at 1.28 and expect the pair to return to 1.37 in 2021 amid the improving situation in the global economy and the weakening of the dollar due to the super soft policy of the Fed.