Analysts at Citibank point out that escalating US-China tensions risks and US political uncertainties weighed on the US dollar. According to them, the slide of the US Dollar index below 96 supported the euro.
“EA ‘break-up’ risk premia has now markedly been reduced. The key inflection point for EA risk premia was the good news on the EU recovery fund. Euro-denominated risk assets have traded much more robustly. Besides, the ECB also upsized and lengthened its PEPP to defend its mandate. It is synchronized monetary and fiscal support that have proven to yield the most “positive“ results during the recovery, favoring EUR.”
The EUR/USD pair looks to have lost some bullish impetus ahead of the London open with the battered US dollar witnessing an oversold bounce across the globe, although the overall trend remains constructive.
The pair is trading 1.1722 at press time, representing a 0.24% decline on the day, having put in a high of 1.1773 during the Asian trading hours.
The pullback could be attributed to technical factors. The greenback looked extremely oversold after the dollar index, which tracks the value of the American currency against majors, fell to a 25-month low of 93.48 during Monday’s US trading hours.
While it has recovered to 93.90 at press time, the index is still down over 3.5% on a quarter-to-date basis. More importantly, its 14-day relative strength index continues to report oversold conditions with a below-30 print.
Besides, gold is witnessing a price pullback. The yellow metal has declined from the record high of $1,981 to $1,932 in the last few hours. Gold often leads the action in the forex markets. The recent dollar sell-off in the forex markets began after gold moved above $1,800 on July 17 and gathered upside momentum.
As a result, a deeper decline in EUR/USD cannot be ruled out. That said, the overall bias would remain bullish while the pair holds above the ascending 10-day simple moving average, currently at 1.1549. The European data docket is empty, while across the pond, the US Consumer Confidence is scheduled for release at 14:00 GMT. The data, however, is likely to be overshadowed by action in the gold market.
Markets expect the Federal Reserve to sound dovish on Wednesday, given the recent resurgence in the coronavirus cases in the US. The Fed funds futures curve shows traders are pricing in the possibility of the Fed cutting rates to negative territory in the third quarter of 2021. Hence, the dollar may have a tough time holding on to stronger corrective rally, if any.
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