12.08.202018:31 Forex Analysis & Reviews: EUR / USD: correction may turn into a trend change

By the end of the trading session on Wednesday, the US dollar index was again under pressure. The greenback lost more than 0.3% against a basket of six competitors, breaking down the line of the medium-term upward trend. The long-term trend, on the other hand, is still upward and its line is at 93.15. In general, we are now witnessing a draining downward movement from the level of 97.00 and attempts to consolidate within the level of 93.00.

Meanwhile, the level of uncertainty in the global economy remains elevated, and this makes investors look at the US dollar as a defensive asset. The Fed is currently pursuing a soft policy strategy, but with any hint of a sustainable recovery, the regulator may change its course. The curtailment of the quantitative easing program is not excluded, the first sign will be the active purchase of bonds. Senior Fed officials last week made it clear that they are ready to adjust their instruments if the need arises.

Moreover, financial officials can adjust the course of policy in any direction. According to market participants, medium and long-term risks are still biased towards a relatively tight policy compared to the ECB.

Eurozone statistics continue to point to a gradual recovery from the pandemic. Economists, however, believe that the path to full recovery in the region will be long and not without constraints. Consumer spending will remain under pressure as social distancing measures persist and no one knows how long it will take. Sectors such as transport and tourism remain under attack. As for industrial production, it is now 11% lower in the eurozone than in February, before the introduction of a general quarantine.

The euro, meanwhile, has risen more than 10% against the dollar since mid-March, when EUR / USD fell to 1.0640. Last week, it went above 1.1900, but after the publication of data from the US labor market, which indicated that the economic recovery continues, the euro slipped to the 17th figure where it continues to consolidate. On Wednesday, the US also released equally optimistic inflation data. The growth of the consumer price index accelerated both in annual and monthly terms. In addition, the indicator exceeded the forecasts of experts, which allows us to hope for the best in the US economy.

We now have a large volume of long positions in the euro and the same volume of short positions in the dollar. As a result, all this may lead to a deep correction of the EUR / USD pair.

At the end of this week, traders will be focusing on updated data on economic growth in the eurozone for the second quarter. GDP is expected to decline in line with the first estimate - 12.1% after falling 3.6% in the first quarter.

If the figure turns out to be weaker, then the euro may well move further away from the recent highs around 1.1900. At the same time, the data better than the first estimate should strengthen the euro, at least in the short term.

EUR / USD was able to rebound from a multi-day low on Wednesday, but in case the downward movement resumes, we can consider a scenario of a decline to 1.1690 and 1.1670. If the quote manages to gain a foothold above the level of 1.1790, then a hike to the recent values of 1.1830 and 1.1840 is possible.