EUR/USD: who gets what

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General

The performance of the EUR/USD has started being pretty interesting. Recently, the price breached the local resistance of 1.1000 clearing the way to the lower 3-month resistance of 1.1140. Technically, reaching there is a matter of just one confident leap, which may well occur throughout the day. But staying there would require a mid-term fundamental tilt in the balance of power between the EUR and the USD. Does it have a chance to happen? It does, but so does a scenario that the USD takes over the ride. Therefore, here is the breakdown of factors that favor one or another so that you can follow them and decide for yourself where this road leads.

Behind the EUR

The main driver behind the rise of the EUR is the advance that the European authorities are pushing forward in aiding the European economy to recover quicker and smoother from the lockdown period and the virus damage. You hear about the European Commission extending the financial aid, you hear about the German Chancellor and the French President discussing unprecedented stimulus to support the Eurozone, you hear about the European Central Bank’s quantitative ease – all of this, coupled with the decreasing virus infection and increasing economic and social activity brings back hope for the EUR.

Behind the USD

On the other side, you have the “American” front. Lately, it has two focus points: Hong-Kong and Twitter. Hong-Kong is a stumbling block in the US-China relations that were on a relatively positive note in the beginning of the year. Now, on the contrary, we hear the Chinese officials warning that the US is igniting another Cold War, while the US President Donald Trump is unhappy with how China is handling Hong-Kong’s democratic rights and lately those of Uyghurs. Obviously, the EU is bound to pick the side, and it is the US as there is no denial of the “true” ideological line of “democracy and freedom” successfully practiced in the Western states. Twitter, on the other side, is more of an internal issue President Trump. However, it challenges the Sino-American relation in the amount of media coverage. That has to do with the November 2020 elections, the war for which has already started in the fields of the Internet comments. Therefore, although quite incomparable to the issue of Hong-Kong in terms of geopolitical importance for the US, Donald Trump cannot afford to lose this battle either. The overall tension produced by both situations is pushes away all confidence from international investors putting them back into the run-for-safety mode and making them demand the USD.

Equilibrium

So far, the balance is tilted towards the EUR but that may be merely temporary happiness that the European currency is experiencing finally seeing the cancellation of doom in Europe. However, the long-term perspective remains highly unclear from both currencies. The ECB, for example, recognized recently that the recovery process is closer to the worst-case scenario as commented by the ECB President Christine Lagarde. The emotional impact of that recognition was clearly offset by multiple processes to set the European recovery in the best possible mode. The long-term impact, however, is still to be discovered as investors will be quick to recognize the reality – whatever it is. The same applies to the USD, however, with a more complicated correlation to the news. Generally speaking, a bad international environment would push the USD on risk-off moods. However, the long-term effect of any serious negative scenario like a US-China Trade War 2.0 would also bring the US dollar down eventually if the fundamentals of the American economic prosperity are undermined.

Technical outlook

The long-term trend for the EUR/USD is bearish. It is “supposed” to be so as the fundamentals behind the USD are stronger anyway. Fluctuation such as we see, when the Eurozone is trying to get the better side between being on the brink of de facto dysfunctional Union and hoping for better recovery in a sudden strike of European unity only confirms the internal weakness of the Euro. The USD, on the other side, enjoys both privileges of a world reserve currency and the one supported by the strongest and largest economy in the world. Therefore, the question is: does the EUR has long-term potentials to break this trend and not fall to the support of the Moving Averages again? We will discover that soon enough. But for the moment, we can say “enjoy the flight” to the EUR/USD as it may end quite quickly.

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FBS Analyst Team

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