20.08.202010:07 Forex Analysis & Reviews: EUR/USD and USD/CAD: Expectations of a compromise between Republicans and Democrats are bringing back demand for the US dollar.

Rumors of a progress on the negotiations on a new aid package to the US economy increased demand for the US dollar. It led to a rather significant strengthening against the euro and the pound, in which the pound was particularly affected, losing more than 150 points in one day.

The main stumbling block on the creation of a new package was the disagreements on the amount of funds. Democrats are seeking for a $ 3.5 trillion package, while Republicans see little need for it. However, most recently, the leaders of the Democratic Party announced their readiness to reduce the size of the fund into $ 2 trillion, but the presidential administration is aiming to accept only an amount of $ 1 trillion. They signaled though that they are ready to raise the bar if necessary.

Thus, yesterday, the White House announced that unofficial negotiations between Republicans and Democrats are underway on the approval of a new aid package for the US economy. And now that a compromise is highly likely to happen, the dollar may begin to increase against a number of risky assets.

In line with this, risk sentiment among investors have also shifted, and yesterday's Fed protocol clearly indicates this. According to the report, the global economy is still under a difficult situation, mainly because the coronavirus still poses serious risks to financial stability especially if the pandemic persists, or if a second wave of the outbreak occurs, which many expect this winter. Disinflation is the main risk in relation to price pressures, so betting on any changes in the medium term in interest rates would not be entirely correct. Moreover, the Fed officials see minor advantages of controlling the yield curve and target yield levels, which will most likely lead to the preservation of this approach to profitability in the future and may even increase management's attention to this issue. However, there are those at the Fed who fear that control of the yield curve could lead to an excessive increase in the central bank's balance sheet. Controlling profitability and its recent growth did not lead to an inflow of the US dollar, which indicates a rather conservative attitude of investors towards the current market situation. In the event of a decrease in demand for risky assets, the US dollar is unlikely to be in strong demand; rather, cash flows will again flow into a more protected and safer instrument, namely gold. In the event of a decrease in demand for risky assets, the US dollar is unlikely to be in strong demand; rather, cash flows will again flow into a more protected and safer instrument, namely gold. In the event of a decrease in demand for risky assets, the US dollar is unlikely to be in strong demand; rather, cash flows will again flow into a more protected and safer instrument, namely gold.

The speech of Fed spokesman Thomas Barkin also proves the general view of many leaders on the situation. The head of the Richmond Fed said that recent data show how the US economy is recovering, but its further course depends on the development of the situation with the coronavirus. Nonetheless, the Fed is committed to maintaining the economy, with which ultra-low rates are now advisable.

So, for the technical picture of the EUR / USD pair, the sharp collapse of the euro yesterday shook the bulls in the market. They now need to protect the support level of 1.1830, as a breakout of which will only increase the pressure on the euro and push the trading instrument even lower to a price level of 1.1780. However, the key target of the bears remains to be the support level of 1.1710, and the price will only return if the bulls regain resistance at the level of 1.1890.

USD / CAD

The Canadian dollar declined after data on annual inflation revealed to have eased in July amid widespread slowdown in price growth. Pent-up demand has ended, and the problems associated with the coronavirus and the slowdown in consumer activity have not disappeared, which led to a decrease in prices for food and services. According to a report, CPI in July rose by only 0.1%, lower than the expected 0.3% rise.

In addition, the return of wholesale trade to pre-crisis levels was ignored by traders, even if the indicator rose 18.5% in June and amounted to CA$ 62.06 billion.

Thus, for the technical picture of the USD/CAD pair, a breakout of the resistance level of 1.3230 will attract the bears to return and be active in the market, which will most likely lead to a price drop below the support level of 1.3185. Such is sure to bring the pair in the direction of the lows of 1.3135 and 1.3080.

Oil

Oil continues to stagnate, ignoring various reserve figures from the US Department of Energy. Such confirms the fact that traders are clearly interested in this trading instrument, especially after what happened during the height of the coronavirus pandemic. Nonetheless, the report indicates that US commercial oil inventories fell 1.6 million barrels to 512.5 million barrels over the week of August 8-14, but US oil inventories are still about 15% above the 5-year average. Economists had expected a more noticeable decline in US oil inventories, 2.7 million barrels from the previous week, so there was no market reaction to the data. Most likely, black gold will continue to be in a narrow price range of $ 41-43 per barrel.