Expert Investor
Author: Mauricio Carrillo
Senior Reporter
Mauricio Carrillo

EUR/USD Extends Rally While DXY Heads to 5-10 Years of Weakness

The Euro is trading positive on Wednesday for the eighth session in a row as market sentiment is buoyant amid the reopen of economies in the United States and the lifting of social distancing measures in Europe.

Yes, it doesn't matter that the number of global cases and the daily average of new patients remain on the upside, or that the United States is in the middle of a civil unrest fueled by an incendiary president. The sentiment is positive in financial markets due to the optimism generated by the return of a normal situation. Well, in any case, it would be a new normal.

One of the few casualties in the current situation is the dollar index amid the status in the United States and the money pumped by the Federal Reserve and the Congress to save the economy.

DXY has been trading negative for seven days in a row, and it is now testing its lowest level since March 12 at 97.30.

Just as a matter of fact, according to the latest update of the COVID-19 Dashboard by the Center for Systems Science and Engineering at Johns Hopkins University, over 6.4 million cases have been confirmed in 188 countries, and the COVID-19 virus has killed more than 380K persons.

Dollar Ahead of Five-to-Ten Years of Weakness

DXY Daily Chart

The dollar could be heading to a period of five to ten years of weakness with “dramatic falls.” Or at least it is what Wall Street strategies are considering right now as a possible outcome for the US dollar.

According to a report published by the Financial Times, while big economies such as China had begun to reopen with relative success and the European Union is moving towards a recovery fund easing fiscal concerns across Europe, the United States is in the middle of crisis mixing COVID-19 and protests.

Goldman strategist Zach Pandl said:

We had been discouraging investors from putting dollar shorts in their portfolios during the past few months because of our concern about the [backdrop], but that has changed.

The report also says that experts do not have the confidence to keep optimism in the United States and are recommending investors to "to position for dollar downside" in their strategies.

Finally, authors Eva Szalay and Colby Smith highlight that "Goldman, JPMorgan, Deutsche Bank, and Citigroup have argued in recent days that the currency's long rally could be finally over." That global optimism, as lockdowns are being eased, is driving the dollar sell-off.

In that framework, the article quoted Calvin Tse, a strategist at Citigroup, saying that the dollar could now be heading to a long term weakness phase.

Tse said:

If the global economy really is bottoming out and rebounding again, and US interest rates are at zero and potential growth is lower than emerging markets, we could see the dollar enter into a bear market that could last for five to 10 years.

DXY weakness is fueling EUR/USD gains. It is not a coincidence that while DXY is at minimums since March 11, the EUR/USD is at highs since March 16.

More Stimulus on The Table

Another key driver for DXY decline and, for instance, euro upside, is the civil unrest in the United States and potential second wave of COVID-19 cases. In that framework, the Federal Reserve and the US Congress would be forced to approve more stimulus and to pump more dollars into the economy.

Actually, a second round of stimulus checks is under debate in Congress right now. Besides, unemployment has been skyrocketing in the last months, and new projections for the Gross Domestic Product say that it can fall as much as 52% in the second quarter, according to the Atlanta Fed Project GDPNow.

Atlanta Fed Project

As you may know, new money injected into the economy would push the US Dollar down and fuel its counterparts, including euro, pound, yen, and gold to the upside.

Euro Supported by The EU Commission

Among the relaxing of lockdown measures, the European Union is also supporting the euro's rally in the short and long term.

As the European Commission, Germany's leader Angela Merkel, France's President Emmanuel Macron, and Spain's Pedro Sanchez are moving towards a coronavirus crisis fund, the sense to return for a new normal is inspiring European citizens and the single currency. Besides, upbeat economic data in the union is fueling hopes.

EUR/USD Trades at Highs Since March 16

EUR/USD Daily Chart

The euro is trading positive on Wednesday against the US dollar with the single currency consolidating levels above the 1.1200 mark and testing prices not seen since March 16 at 1.1230.

Currently, EUR/USD is trading at 1.1200, which is 0.25% positive on the day. With today's advance, the most traded pair in the world would be experiencing its eighth consecutive day of gains.

Since May 25's bottom at 1.0870, EUR/USD has rallied around 3.2% to Wednesday's highs at the mentioned 1.1230.

According to FXStreet analyst Valeria Bednarik, the EUR/USD is trading on consolidation mode as US indexes advance is leaving little room for dollar's recovery.

The pair is trading at around 1.1200, retaining its bullish stance. In the 4-hour chart, it continues to develop above a bullish 20 SMA which stands over 200 pips above the larger ones. The Momentum indicator eases within positive levels, while the RSI remains in overbought territory. A downward corrective movement seems unlikely, with buying interest set to defend the 1.1160 static support area.

On a broader picture, Karen Jones, Team Head FICC Technical Analysis Research at Commerzbank, says that the next target for the EUR/USD is the 1.1240, December peak.

EUR/USD remains bid and looks set to challenge the 1.1240 December peak; our initial target remains the 200-week MA at 1.1333. This is the break point for the 1.1495 March peak.

Yes, it seems like it is all about the dollar's weakness and not euro strength, but it is what it is.

Meet The Author
Mauricio Carrillo
Mauricio Carrillo
Senior Reporter

Mauricio is a newer member of the team and a very welcome addition. He is a financial journalist and trader with over ten years of experience in stocks, Forex, commodities, and cryptocurrencies. This experience means he has an excellent understanding of the markets and current events.

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