Forex: Dollar Index at 3-Year Highs; Is The EUR/USD Ready For Parity?
The dollar index is extending gains on Thursday as the unit is taking advantage of improving US Treasury bonds, weak Forex competitors, and falling oil prices. In that line, the euro seems to be in a downside risk position that could lead it below 1.0700 in the middle term, and below parity in the long term windows.
It was on March 9 when the dollar seemed to be destined to trade dovish due to the coronavirus crisis while the euro was rising to the sky. On that day, DXY was trading at 94.65, mínimum level since September 2018, US 10-year Treasury bonds were at 0.0360, and EUR/USD was testing the 1.1500 area, at its highest level since January 2019.
The agenda was dominated by the possible economic impact of the coronavirus health crisis and risk aversion that were fueling Treasury bonds, which at that moment were pushing the dollar down on speculations on Federal Reserve rate cuts to negative levels.
However, everything changed suddenly and rate cuts arrived but not only from the Fed but also from almost all major central banks in the world. Stimulus packages flooded the market with easy money in an effort to contain the impact of the virus.
The dollar was falling due to speculations that the greenback would lose its rate differentials with other currencies. Still, that idea evaporated itself after other central bankers followed the path of rate cuts. Besides, the Fed certainly helped after intervening in the bond market and making Treasurys go up. Both topics helped the DXY.
USD is The King of Currencies When in a Big Crisis
After it bounced on 94.65 on March 9, the DXY performed a stunning 8.16% recovery in just eight sessions to trade at fresh highs of 102.37 on March 19. Indeed, the breaking of the 100.00 level triggered many stop losses that made the movement even more violent, but the chart looks right now very positive.
After peaking at the mentioned 102.37 on Thursday, the dollar index is currently trading in consolidation mode around 101.75, advancing 0.82% in the session.
Chief Currency Analyst at HYCM Giles Coghlan recently wrote that he was reminded of the USD as the king of currencies when it comes to a big crisis.
In the 'sell everything' landscape, the USD is being held as the most liquid currency. With 70% of all currency transactions involving the USD, it is little wonder that the USD is attracting more and more bids.
In Coghlan's views, the DXY is sending a potentially bullish signal "to buy DXY and come back next month."
He went on to say:
The current monthly candle is engulfing around 14 previous months of dollar action putting in a strong potential bullish Engulfing bar on the monthly chart.
Also, DXY is trading at levels not seen since 2017 and after the psychological 100.00 area. Fundamentals are in its favor again as interest rate differentials have returned to its previous status quo. At lower levels, yes, but with a difference in dollar's favor.
If the bullish movement is confirmed, DXY will go up with the most significant resistance being at 103.80, January 2017 highs. After that, 105.00 will be waiting as prices have not traded in almost 18 years.
Is The EUR/USD Ready For Parity?
So, how the bullish dollar is affecting the EUR/USD fluctuation. Well, the euro is trading down against the Greenback and the outlook for the single currency looks pretty dovish, not only talking about technical factors but also fundamental conditions.
After peaking at 1.1495 on March 9, the EUR/USD entered in a very negative dynamic that drove the pair to break below February 20 lows at 1.0777 and fell to its minimum since April 2017 at 1.0725. Currently, EUR/USD is consolidating levels around 1.0790, declining 1.10% on the session.
According to strategists at TD Securities, the EUR/USD entered a new and lower trading range that could lead the pair to early-2017 lows at 1.0341.
TDS analysis commented:
Given the high degree of intraday volatility, we would like to see a weekly close below 1.0770 before drawing too many conclusions.
We do suspect, however, we are transitioning into a new, lower trading range. Our immediate focus now shifts to a test of 1.0570, although we note the early-2017 lows at 1.0341 could also come into view.
In the same line, March monthly candle is engulfing 13 previous months of price action, and after peaking nearly at 1.1500, it is now trading below February lows at 1.0777. If confirmed at the end of the period, the EUR/USD could be sending a strong potential dovish Engulfing bar on the monthly chart.
Given that we are trading in uncharted waters with the coronavirus. The Lack of coordination between European governments and the little ability of the ECB to have synergy with governments and launch coordinated measures are putting the euro in serious risk.
The combination of technical and fundamental factors could be leading the EUR/USD to test the 1.0341 level in the middle term. If conditions remain the same and euro defenders are not able to protect that critical support, we could be in the position of being the witnesses of a downside trend that would lead the euro to parity against the US dollar for the first time since December 2002.
And given the factors, I wouldn't take below parity prices out of the table and send the EUR/USD to the 0.9521 not traded in the last 18 years.
Crazy enough? Well, we could be living at the end of the world as we know it.
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.