EUR/USD: King dollar’s comeback seems unstoppable, and for good reasons
The tables have turned – King dollar is back with a vengeance after a long period of decline. Upbeat US may have supported the world’s top currency early in the week, and now it is the lack of progress in Washington that can be mostly attributed to the greenback’s advance.
While Republicans and Democrats are willing to resume negotiations on the next fiscal package, they have yet to set a time for talks. Moreover, President Donald Trump’s executive orders are not only failing to urge lawmakers to act – they may be useless.
Most importantly, federal unemployment benefits – decreed at $400/week by the White House – are conditioned on $100/week from states. However, states’ high debt levels – originating from before and exacerbated during the pandemic – may prevent such support. Moreover, it is unclear if executive action has legal standing.
In the meantime, Trump seems enamored with the power of the pen, and he is touting a capital gains tax cut – reversing his position. While that is boosting stocks, it does not diminish flows to the safe-haven dollar. Lower fiscal spending means a stronger dollar.
Another boost to the greenback comes from the latest US coronavirus figures – cases fell below 50,000 per day in Monday’s reporting. While the most recent decline is attributed tot he “weekend effect,” the trend is clearly to the downside.
That contrasts with the trend in the old continent, which is to the upside. Germany’s COVID-19 reproduction rate has been consistently above 1, worrying health officials. Overall, Europe’s coronavirus situation is currently far better than America’s but the direction of travel is changing.
An update on business sentiment is due out later on Tuesday from ZEW Economic Sentiment figures. A minor decline is on the cards for August after several months of rapid increases.
Elsewhere, Sno-American tensions remain elevated. Trump said that the trade deal “means very little” to him. His comments come ahead of a meeting between top trade officials from the world’s largest economies.
Investors have been able to shrug off worsening relations, but are sensitive to the trade deal. So far, they are taking Trump’s words as bluster, but if the accord falls apart, may stumble and the safe-haven dollar has room to rise.
Overall, the wind is blowing strongly in favor of the dollar and moderately against .
EUR/USD Technical Analysis
Euro/dollar is suffering from downside momentum on the four-hour chart and is set to fall below the 100 Simple Moving Average after losing the 50 SMA. The Relative Strength Index is above 30, thus outside oversold conditions.
Initial support is at the daily low of 1.1730, followed by 1.17, a double-bottom from late July. Further down, 1.1625 and 1.545 await the currency pair.
EUR/USD faces some resistance at 1.1755, the daily high, followed by 1.1810, a temporary cushion last week. Further above, 1.1850 and 1.1915 are eyed.