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26.05.202010:27 Forex Analysis & Reviews: EUR/USD: dollar's unexpected support and euro's disappointment

Long-term review
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Exchange Rates 26.05.2020 analysis

The European and American currencies are going through difficult times again. Pressure on the euro has increased due to a number of negative factors, and the dollar, as usual, is trying to capitalize on difficult circumstances. Experts expect further confrontation in the EUR/USD pair.

The US currency received unexpected support from two factors: the political mess associated with Hong Kong, and the resumption of trade battles between Washington and Beijing. It can be recalled that the authorities of China intended to tighten control over Hong Kong, protesting US cooperation with Taiwan. In response, the United States threatened China with sanctions, which could put an additional burden on existing trade restrictions. Taiwan also did not stand aside, rightly reasoning that when the fate of the state is decided, one must be decisive. Hong Kong authorities said that the principle of "one country - two systems" being implemented is unacceptable in relations with mainland China. At the moment, the Chinese authorities have come to a kind of compromise: they are preparing a bill on national security in Hong Kong.

The conflict, which is gaining strength, has become a significant help for the US currency. At the beginning of this week, anti-risk sentiments prevail, which provide background support to the dollar. However, a disadvantage can be an increase in risk appetite, elements of which experts fix from time to time. In such a situation, the USD becomes vulnerable, losing its strong position. An additional impulse for increasing risk appetite may be the strengthening of US sanctions rhetoric against China, which will increase pressure on the dollar.

If the Chinese authorities adopt the bill against Hong Kong, and the trade battles between the US and China gain strength, partnered with an event of the current day - an investigation of the causes of the COVID-19 pandemic, which China is accused of causing, then the pressure on the EUR/USD pair will increase. In a similar situation, the bears will be the winners, who will be able to test the support level of 1.0860. In the case of another scenario, if China compromises on any of the issues (relating to Hong Kong or COVID-19), then the "bulls" who will be able to return to around 1.0990 will have the advantage. On Tuesday, May 26, the EUR/USD pair showed a steady rise to 1.0928 - 1.0929, but then fell slightly. Subsequently, the pair moved to the level of 1.0925, but did not abandon attempts to rise higher.

Experts are more concerned about the dynamics of the European currency. Many experts refuse the euro a chance for growth, although the situation may change at any time. For a long time, the euro is in the negative zone; however, the market expects a change in the vector, if not in the near future, then in the medium-term. A significant disappointment for euro was the difficulties that have arisen among European leaders in the process of implementing the Eurozone financial assistance program.

It can be recalled that the joint plan proposed by German Chancellor Angela Merkel and French President Emmanuel Macron, which provides for the restoration of the EU economy by creating a common fund worth € 500 billion, caused a rejection in a number of countries – Austria, Denmark, the Netherlands and Sweden did not support this initiative. Experts called these states excessively "thrifty," that is, simply mean. They proposed their action plan, according to which financial assistance should be provided to the EU countries, the most affected by the pandemic, in the form of targeted loans. These loans will be issued on favorable terms for two years. At the same time, the authorities of the four "lean" states intend to control the costs of the host parties, emphasizing that these funds should be directed to a number of industries, including health, research and innovation, and environmental transformation.

Experts say that the current uncertainty regarding the Franco-German plan to form a pan-European fund hinders the strengthening of the euro. On Monday, May 25, the single currency declined 0.2% against the US, dropping to a weekly low of $ 1.0871. An additional factor in the decline was the growing tension in relations between Washington and Beijing, which sharply increased the demand for the dollar, used as an asset-refuge.

The cautious attitude of investors towards the prospects for European assets played a negative role for the euro. Market participants do not too believe in the further growth of eurozone assets. Experts consider the reason for this is serious differences in views on solving financial problems among European leaders. The current situation significantly weakens the position of the single currency, reducing the level of confidence in it. According to Citi's currency strategists, investors, assessing the scale of the disaster caused by COVID-19, consider the stimulus measures of central banks and EU leaders insufficient for the speedy restoration of economic growth in the region. In such a situation, the euro loses significantly to the dollar, so investors continue to invest in USD and ignore EUR.

However, the European currency does not give up and periodically tries to rise higher, trying to break through the psychologically important barrier of 1.1000. Despite the failure of these attempts, the EUR/USD is trying to enter the upward spiral. Citi experts are confident that the pair will leave a wide range of 1.0700 - 1.1000 and fall below current values in the near future. According to experts, the EUR/USD pair in the medium term will be between 1.0300 and 1.0500. Citi advises selling EUR/USD on growth, given the high probability of breaking through the lower limit of the current range. At the same time, experts are betting on a successful attack on the lower limit of the channel, breaking through which is only a matter of time.

Exchange Rates 26.05.2020 analysis

According to analysts, there is a growing probability that the dollar in the medium-term will pull the rope on itself again, and the Euro, trying to hold the positions it has won, will still decline. Experts expect to restore the relative balance in the EUR/USD pair in the near future; however, the euro, unlike the imposing dollar, will have to concentrate and make a lot of effort not to go to the bottom.

Larisa Kolesnikova
Analytical expert of InstaForex
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