13.12.201912:27 Forex Analysis & Reviews: Dollar at crossroads, while Euro and Pound already celebrating Christmas

One gets the feeling that this year, Christmas came to the financial markets somewhat earlier than the due date. The strong release on American employment for November, the proximity of the Tories victory in the UK early elections, as well as the growing confidence in the conclusion of a trade agreement between the United States and the Celestial Empire, became a real holiday for investors. Against this background, the risk appetite rose sharply, as did the pound, which demonstrated one of the best daily dynamics in its history.

The GBP / USD currency pair jumped to the highest level since May 2018 on the news that conservatives won a landslide election victory, defeating Labor and gaining more than 350 seats in the House of Commons.

"This is certainly a significant advantage for the Conservative Party in the framework of the Brexit vote before Christmas. It is likely that the United Kingdom will exit the EU in early 2020. In this case, the pound will soar to $ 1.36–1.37, "said MUFG Bank strategist Fritz Louw.

Amid the pound rally, the US dollar showed a weakening on all fronts.

The USD index broke down the "bear flag", which is part of a pullback to the double top. Together with the breakdown of the flag, the indicator crossed the 200-period DMA and completed the larger head and shoulders figure, which has been forming since August.

At the same time, the index fell below the upward trend line and the bottom of the upward channel, which we observed since September 2018. If the indicator remains below the bottom of the channel, the situation will develop into a full-fledged downtrend. On the other hand, it can equally return to the upper boundary of the channel.

At the end of the December meeting, the American Central Bank made it clear that the rate would remain low throughout the next year, but we were already witnesses of how the Fed's rhetoric changed dramatically from meeting to meeting, and sometimes even between them. Apparently, the regulator decided not to worry the markets and the US president on the eve of the critical date of December 15, when the White House should introduce new tariffs against Chinese imports.

It is possible that this is why the dollar cannot decide between the resumption of its upward movement and slipping into a downtrend.

Now everything will depend on the trade negotiations between Washington and Beijing, but even in this case, it is difficult to predict how the market will react. In the past, we have repeatedly noted that the greenback sometimes grows both because of its status as a "safe haven" (the currency in which US government bonds are denominated) and as a risky asset.

The optimistic mood on Brexit was strengthened by the euro, and the EUR / USD pair reached its highest level since August around 1.1200.

ECB President Christine Lagarde at her first press conference following the December meeting of the regulator expressed optimism about the prospects for the eurozone economy.

Few doubted that the former head of the IMF would be a much lesser fan of super-soft monetary policy than its predecessor, Mario Draghi. She even joked that she was not a "dove" and not a "hawk", but a "wise owl". Considering the words of Lagarde about the risks less pronounced today than before and about some initial signs of economic stabilization, it can be assumed that new characters will appear in the ECB Governing Council. "Owls", which will soon supplant "doves".

As a result of the December meeting of the ECB, the derivatives market shifted expectations regarding a reduction in the deposit rate by 2021, while the yield on German government bonds increased, which supported the single European currency.

Moreover, the growth of EUR/USD could be even more impressive if Lagarde spoke about the side effects of the policy of negative interest rates.

Meanwhile, Washington and Beijing are on the verge of concluding a trade agreement. The United States may suspend some duties on Chinese products and lower others in exchange for the purchase of a greater amount of American agricultural commodities in China, Reuters reported, citing informed sources.

If in the short-term period the S&P 500 rally supports the greenback and restrains the offensive impulse of the "bulls" in EUR/USD, then in the medium and long-term horizons the recovery of the European and Chinese economies will help the pair rise to 1.15.