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28.08.202014:40 Forex Analysis & Reviews: EUR/USD: Fed may sink the dollar, but it is not in a rush to move to the bottom

Long-term review
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Exchange Rates 28.08.2020 analysis

Fed's Chairman, Jerome Powell, confirmed the new regulator's policy, which implies a likely rise in inflation above the targeted level of 2% as well as outlined employment growth as the main goal of the Central Bank, during yesterday's virtual symposium in Jackson Hole.

In view of his statements, the yield on US Treasuries rose to the highest level in several months, which supported the dollar. The USD index rebounded sharply, bouncing from a weekly low of 92.4 points and adding about 1%. The expected change in the FRS rate was one of the drivers of this movement: investors expected that the Central Bank would change the target average inflation.

However, the US currency quickly lost its achievements, as traders consider higher inflation in the future and its impact on real profitability.

Analysts in ING said the US Central Bank will keep interest rates low for a longer time and be tolerant of higher inflation, which will be the ground for the formation of negative real Treasury yields and the decline of the USD.

But they added that the main problem for further quick sell-off of the US currency is positioning. The net speculative short dollar positions and long positions in EUR/USD are near their highs since March 2018

Although Powell's statements left the dollar under pressure, the fact that the Fed still refuses to adopt a policy of negative interest rates, preferring to keep them near zero, is positive for the US dollar.

In addition, Fed's promise of cheap money and sufficient liquidity attracts investors as well as the USD.

Exchange Rates 28.08.2020 analysis

It is assumed that the new policy of the Central Bank will help revive the national economy and allow it to entirely move forward.

Moreover, market participants waited for the Fed's Chairman cautious comments, but instead he called the US economy "healthy", except for areas affected by the COVID-19.

Against the background of his statements, the EUR/USD pair rose above the level of 1.19.

Thus, the euro is still trading near two-year highs against the US dollar. However, recent statistics from Europe and the US indicate that the topic of the gap in the pace of recovery of the American and European economies may play in the opposite direction, which is positive for the dollar.

The market has recently seen relatively strong economic performance in the United States, such as durable goods and housing data. On the contrary, European PMI releases did not meet expectations.

Investors, in turn, continue to ignore the rise in coronavirus cases in the EU, from which Spain is still in the lead.

At the same time, the number of new cases of COVID-19 infection continues to decline in the United States and this could support the dollar.

However, we should also consider other important factors such as the US presidential election, before which investors can take a more cautious position, which will give the dollar a chance to grow.

Meanwhile, Euro's further strengthening is unlikely to be unnoticed by the ECB, which is concerned about the recovery of the European economy after the impact of the coronavirus pandemic.

It should be noted that the ECB calmed down the bulls' intensity last in August-September 2017, when the EUR/USD rate exceeded 1.20. Thus, we can expect similar verbal interventions from Frankfurt, if the main currency pair shows fast growth again this Autumn.

Viktor Isakov
Analytical expert of InstaForex
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