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EURUSD Drops Below 1.20 As Dollar Shorts Are Trimmed

/ US Dollar Jul 09, 2021 - 11:10 AM GMT

By: S_N_Chatterjee

Activity is back in full swing in the forex market after the latest FED meeting, which has stirred all major currency pairs, including the EURUSD. Even though the pair has been trading up since the beginning of April, the order flow shifted towards the bearish side as interest rates are expected  to rise as soon as 2022 in the US, due to a faster economic recovery and robust inflation figures.

A weakening US Dollar for the entire 2020 had been a supportive factor for the global economy, at a time when the recovery from the COVID-19 pandemic had started. However, experts at Axia Investments believe that reverse in Dollar weakness will have the opposite effect, acting as a tightening.

US Dollar and Euro

The FED hints at tapering

For the past several FED meetings, investors have been closely monitoring the dot plot, since that could have provided hints on how FOMC participants expect rates to evolve in the future. The June 15-16, 2021, meeting provided some important developments, considering 7 participants were expecting the Federal Funds Rate to rise in 2022, much earlier than what the market had been expecting.

The central bank’s speech around inflation was also on the cautious side, but still with the same view that inflation is elevated mainly due to transitory effects. If the new projections turn out to be true and the FED ends up being the first central bank to hike rates after the COVID-19 pandemic, it can act as a major tailwind for the US Dollar, thus pushing the EURUSD exchange rate lower.

Consensus on the Dollar – bearish at the beginning of 2020

Leading experts were mostly in favor of continued US Dollar weakness heading into 2021, as the persistent monetary stimulus in the USA was not projected to end. Short-interest on the Dollar spiked and now that the consensus is shifting, the global reserve currency is rising on the back of short-covering.

Axia’s experts expect currency trading to remain choppy over the upcoming months, as economic uncertainty could weigh on the interest rate hike prospects. Navigating the post-pandemic economy comes with unique challenges since the massive amount of fiscal spending drove the global debt-to-GDP to new extremes, now in a territory not seen since the end of WWII.

EURUSD weakens – can it break below key support?

EURUSD technical analysis

The EURUSD continues to trade inside a triangle formation, now pointing south, threatening to retest a key support area located around 1.18. There are already two prior bounces of that zone, which is why there could be some Dollar weakness once the exchange rate reaches it.

However, the main risk for an extension on the downside is if buyers are not rejoining the trend strong enough and a breakout below the structure occurs. That will be a major technical development that could push the EURUSD exchange rate towards a key psychological area around 1.10.

Uncertainty on the next major move forward will continue to linger since interest rate hike expectations could change on the back of sluggish global recovery, or slowing inflation.

By S N Chatterjee

Copyright 2021 © S N Chatterjee - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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