27.08.202013:05 Forex Analysis & Reviews: EUR / USD: A new Fed policy will lower demand for the US dollar

The dollar sank to a weekly low of 92.8 points ahead of the speech by Fed Chairman Jerome Powell in Jackson Hole.

It suffered major losses against the pound, kiwi, aussie, and euro, mainly due to the problems that the United States is facing.

However, the situation in various European countries is deteriorating, in particular, Italy has recorded the largest daily increase of COVID-19 cases since May. Although these events are of little concern to market participants, if such dynamics continue, authorities will be forced to move from local restrictions to global quarantine, which will limit the growth of euro in the market.

Thus, the EUR / USD pair is trading with an unclear direction for four days already, at a price range of 1.1770-1.1850.

Moreover, traders are waiting for signals from the Fed about the prospects for monetary policy, that is, the position of the Central Bank on the target inflation.

Under a new strategy, the Fed is expected to keep inflation above target for a period of time, so interest rates will remain at its current level to achieve such a statistics.

It will raise the value of stocks in the market, but will inevitably decrease demand for the US dollar.

But if Powell does not give signal that the Fed is ready to tolerate inflation above the target level, demand for dollar is likely to increase, which will push the EUR / USD pair down in the trading chart.

Nonetheless, it seems that the bearish trend of the dollar is beginning to end, and new drivers are needed to continue its downward movement in the market.

Among which is the situation of the United States with coronavirus, that is, if cases and deaths associated with the virus stabilizes, the Fed may refrain from introducing new stimulus measures until the presidential elections in November.

Since it was the COVID-19 pandemic that caused a large-scale monetary response from the central bank, a decrease in daily incidence will make USD bears nervous.

In addition, the dollar is so overvalued now that finding an opportunity to sell it is difficult. While strong statistics on China can somehow explain its depreciation against the yuan, the emerging epidemiological situation in Europe does not at all imply an expensive euro.

"Many believe that the EU will surpass the US in terms of economic recovery, but we do not expect this," strategists at Danske Bank said.

According to them, EUR / USD will advance to a rate of 1.16 in three months, but will return to 1.12 in six to twelve months.

"Of course, there are factors that could lead the pair to 1.25. One of which is if the EU proves that it is the engine of global growth, while the second one is if the Fed allows inflation to exceed the target level, " they added.