The correction of the US dollar did not last long as it resumed the decline against majors. The US Dollar Index (DXY) dropped to the lowest in over two years. No particular reason was behind the decline on Tuesday, other than a solid bearish trend. Current price action appears to target a new equilibrium for the US dollar at lower levels.
GBP/USD: Could it rise to 1.3500 despite Brexit?
Cable made a substantial technical break on Tuesday, leading to more gains. GBP/USD made a marginal new YTD high at 1.3267. The next target is spotted around 1.3350, while the next strong resistance is seen around 1.3500, the 2019 top. A weekly close clearly above 1.3350 would strengthen the outlook, and the consolidation over 1.3500 would suggest more gains ahead over the medium term, with 1.3750 in sight.
Could GBP/USD get above 1.35 ahead of Brexit and the possibility of negative rates from the Bank of England? The latest round of relatively positive economic data and recent comments from BoE officials were the legs of the recovery of the pound.
“Sterling’s recent good performance and resilience to grim economic data has likely relied on the Brexit story being put on the backburner by investors. With a few sticking points where the two sides still appear far apart, the newsflow around the negotiations may well get worse before it gets better”, warn economists at ING.
They expect a deal to be ultimately reached, but they see the pound facing increasing “Brexit-related stress in the coming weeks, making it a possible key laggard in the G10 space.”
USD/JPY: Is a revisit to 101 possible?
The yen has been performing poorly over the last months, weakened by the change in the market’s mood, but the US dollar has been doing even worse. The USD/JPY pair has lost more than 3% so far this year, although it is far off the March low struck at 101.18. Could the USD revisit that low?
The trend points to the downside in USD/JPY. The strength of the slide will face a challenge if it reaches the July lows and the 104.00 area. A monthly close above 109.00 could change the bias, alleviating the bearish pressure.
“We do not expect USD/JPY to move higher on a sustained basis even if there is an overdue correction lower for risk assets in the month ahead. While the USD could rebound more broadly if risk assets correct lower, the yen should continue to hold its ground”, explained in their latest monthly report, analysts at MUFG. They see that a resurgence of COVID cases and/or evidence a slowdown in global growth could prove more challenging in the near term.
EUR/USD: How will it perform at a critical level?
The EUR/USD is fastly approaching the 1.20 area, a long-term critical level. Above, around 1.21, another significant resistance emerges. Will the euro be able to break and hold? Many analysts see a target at 1.21 and suggest that a correction seems likely before another leg higher.
Upside risks for the euro, MUFG analysts argue, are the reversal in the rise COVID cases and the possibility of the Fed announcing its a monetary policy strategy “that includes immediate action to anchor yields with a strong message to the markets that the Fed wishes to engineer a period of above-target inflation.” Meanwhile, the downside risks for the euro include a sharp reversal in risk appetite and a more dramatic and sudden surge in new COVID cases that could lead to main European countries to introduce aggressive restrictions.
How to play USD weakness?
The key driver behind these moves has been a weaker US dollar, but that does not mean it will always be the case. A rebound in USD/JPY could also take place while EUR/USD and GBP/USD rise. Anything could happen at the current juncture. The most likely scenario seems another leg lower for the US dollar and a potential consolidation at lower ground… for that to happen, the greenback needs to lose some of the key technical levels mentioned before. The EUR/USD at the moment appears to be the safest way to play greenback’s weakness.
With volatility rising in the currency market in August (a month that is usually favourable for the dollar), US/China tensions on the rise, the presidential campaign in the US heating up and the COVID-19 still around, there could be challenging months ahead for the greenback and the bull market in Wall Street.
