27.01.202123:54 Forex Analysis & Reviews: Dollar fell to the bottom or so it seems

In recent months, only negative forecasts have been made for the dollar, with the exception of short-term rallies. At the end of last year, bearish sentiment reached its highest level in a decade. Now the picture is gradually beginning to change. Moreover, there are enough fundamental justifications for both buying and selling the dollar.

On the bears' side we have the ultra-soft policy of the Federal Reserve and the readiness of the new presidential administration to increase financial support for the economy. In the bulls, the bases are less tangible, but nevertheless... The so-called one-sided market, which follows the call of the dollar's fall, does not look organic. Can it be that the whole world believes in the fall of the dollar and it drops without options? There should be a surprise at any of the stages, and the fall will not be eternal. My gut tells me that change is coming. And in some places, opinions about the upcoming growth of the dollar are seeping into the markets.

Despite the fact that officials of the US central bank constantly repeat that it is impossible to raise rates earlier than 2023, they can still reconsider their position. They've done this before. It's all about inflation. A sharp increase in the indicator may take away control of the situation from the central bank and force it to raise rates. What is not an argument in favor of the dollar's growth?

The recovery of the economy after the pandemic can also improve the dollar's position, making government bonds attractive for foreign players who will need to buy the dollar to invest in securities.

The current struggle between bulls and bears may eventually end with a change in the dollar trend. The dollar has been showing signs of consolidation since the weekend and may be preparing to set the level of the local low.

The dollar recovered on Wednesday prior to the results of the Fed meeting and Jerome Powell's press conference, but the mood is unstable. The point is not what Powell will say and how the meeting will end, but how investors will perceive the information.

Meanwhile, ING allows the dollar to rise along with the yield of treasuries, if Powell positively assessed the economic outlook in his statement on monetary policy. Such statements from the central bank may contribute to speculation about an earlier-than-expected reduction in asset purchases. However, experts are not sure that the Fed will change its adaptive policy.

Commerzbank unexpectedly changed its opinion on the dollar. Moreover, the bank is now waiting for the dollar's growth for the same reasons for which they previously expected a fall. We are talking about large-scale vaccination and stimulus measures for the US economy.

There are doubts that Powell will be able to curb the euphoria caused by progress in connection with vaccination and the prospect of increased budget spending, analysts write.

The rebound in the dollar index, in particular, can contribute to the weakening euro, which has experienced a bad day. The European Central Bank has used verbal methods to interrupt the euro's growth. However, the euro tried to catch up in the US session.

Take note that ECB members reported that they are investigating the impact of the difference between the actions of their central bank and the US one on the exchange rate. They do not quite understand why the strengthening of the US economy is accompanied by the weakness of the dollar.

In principle, it will not be difficult to restrain the euro from further growth, since there are fewer reasons to buy it against the background of reflation. Incentives in the EU will be less large-scale, in addition, the euro is under pressure from negative rates.