19.08.202008:01 Forex Analysis & Reviews: Euro will rise, but not as much as previously expected (EUR/USD GBP/USD is very likely to continue to grow after the correction)

The main currency pair euro/dollar resumed its rally on Tuesday in the wake of strong data on the US economy, which came from the construction market. It managed to overcome the strong resistance level of 1.1900.

Can EUR/USD continue to rise in the current environment?

It can be recalled that the single currency began to receive noticeable support after the EU managed to agree on the creation of a recovery fund with financial capacity in the amount of 750 billion euros this summer. These measures have ruled out the possibility of defaults on the debts of entire EU member states at least in the near future. In addition, the strengthening of the single currency coincided with an increase in demand for risky assets on the wave of hopes that the coronavirus infection will weaken in its impact on the global economy. In addition, positive production data for the euro area was a positive development.

It seems that all the conditions for a non-stop rally in the euro in the currency markets are fully met. But everything is not so simple here. Of course, the main competitor of the euro, the US dollar, is completely knockout, beaten by unprecedented stimulus measures from the Fed and the US Treasury, as well as remaining under pressure on the wave of rising demand for risky assets in the United States itself and due to the resumption of its function as a currency-funding.

We believe that the current state of affairs will contribute to the strengthening of the Euro currency in the market, but only against the US currency. And this process will gain impulse. However, it is hardly worth expecting that the ECB will calmly look at this picture.

Why will euro growth be limited?

It should be noted that the euro/dollar pair rose to 1.4000 in 2014, followed by a noticeable addition to the imbalance that appeared on the market, which was expressed in the strongest weakening of the dollar by stimulus programs from the Federal Reserve and keeping the ECB's interest rates quite high at that time. It all ended with the fact that European goods began to lose to American ones on the world market due to the high rate of the euro. This was the reason for radical measures from the regulator, which eventually collapsed the rate of the euro against the dollar to 1.0350. So, something similar can happen when this pair's rate approaches the level of 1.2500. But then, the ECB will be extremely difficult to change the situation, because it does not have any instruments to lower the currency rate. The rates are already at zero or even lower levels, and stimulus measures do not make the currency cheaper like the American one. From here, we can expect serious problems in the eurozone economy with all the ensuing negative consequences. In principle, we can talk about the level of discomfort for the European economy, which starts above 1.1500 while it is growing at the expense of internal reserves - deferred demand due to the coronavirus pandemic, but this will end soon.

What to expect from EURUSD?

We believe that it will receive support in the near future, but as it approaches the level of 1.2100, it will experience difficulties with an increase due to its high value against the dollar, which will impede foreign trade. We also believe that our model provides for a noticeable rebound of the pair from the level of 1.2500 with a strong corrective decline. The price approaching this level will force the ECB to take more decisive measures to weaken the euro, otherwise, the European economy will return again to a period of confusion and vacillation with all the ensuing negative phenomena.

Forecast of the day:

The EUR/USD pair is moving around above the 1.1900 level. It can adjust to it. And if it holds above this level, it will continue to rise to the level of 1.2000.

The GBP/USD pair continues to follow in the wake of the main currency pair. It can also correct down to 1.3200, and if it holds above this level, it will continue to rise to the level of 1.3365.