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FX.co ★ EUR / USD. Coronavirus remain dollar's major problem

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Forex Analysis:::2020-08-03

EUR / USD. Coronavirus remain dollar's major problem

The coronavirus crisis affects the dynamics of currency pairs in different ways. Even for the same currency, COVID-19 can be at first an "ally" and then a merciless enemy. And vice versa. A striking example of such a transformation is the euro-dollar pair, or rather, its price dynamics this year. In January and early February, when the epidemic was only spreading in China, the market was dominated by anti-risk sentiment, which exerted rather mild pressure on the pair: the price sank by only 200 points, having fluttered around the eighth figure.

But then the virus shifted to becoming a pandemic and cause tumult trouble in the United States, where the number of cases grew exponentially. The market panicked - and this panic was already against the US dollar, as it was actively getting rid of, worrying about the prospects for the US economy. On this wave, the EUR/USD pair reached the boundaries of the 15th figure, having risen by 700 points in just three weeks.

However, then the coronavirus reached Europe and the rest of the continents (with the exception of Antarctica), after which the dollar became the most demanded protective asset in just a blink of an eye. If the pair grew from the 8th to the 15th figure for three weeks, then from the 15th figure to the 6th price level, the pair collapsed in just a week and a half, having passed almost a thousand points. The buzz around the greenback was so strong that the US Federal Reserve had to open swap lines with key central banks of the world to provide liquidity.

The American Central Bank began to "pump" the markets with its currency, trying to satisfy the high demand. The hysteria around the dollar gradually faded away, and in early summer the situation leveled off. Since then, the coronavirus has exerted background pressure only on the dollar - the United States remains in the top spot in terms of the number of cases and the number of deaths. The growth of both indicators worries investors, and this concern is again not in favor of the greenback. The "COVID Factor" is the dollar's main problem.

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All this background is necessary to analyze the current situation. The fact is that at the beginning of this week, the dollar tried to recover its positions, while the euro was under pressure throughout the market. And the "coronavirus factor" played an important role here: the news flow from Spain alarmed investors, after which the single currency retreated from the positions it had won. New outbreaks of COVID-19 have been recorded in all regions of this country for several days. And this despite the fact that at the end of June, after three months of strict quarantine, the incidence in Spain almost disappeared. The problems began with an outbreak among fruit pickers in the province of Huesca. An unprecedented influx of illegal migrants from countries where the pandemic is in full swing, and the arrival of seasonal foreign workers, involved in agriculture, has led to new spikes of COVID-19 cases.

In addition, alarming news also comes from other countries: an increase in the incidence was recorded particularly in India, Iran, and Australia (not to mention Brazil and other Latin American countries). The Australian authorities even closed the country's largest state (Victoria) and imposed a curfew in the five millionth city of Melbourne.

Such a fundamental background allowed the EUR/USD bears to continue their correctional decline towards the base of the 17th figure. But at the same time, they failed to overcome the nearest and most important resistance level of 1.1701 (Tenkan-sen line on the daily chart). Therefore, it is very risky to enter sales now, despite the bearish sentiment among traders. In any case, the dollar will not be able to repeat the spring sensation when the "coronavirus factor" acted as an ally of the dollar. Despite surges in incidence in Europe, the overall situation there is controlled, while in the US, the coronavirus continues to update anti-records. The number of infections continues to rise both in the southern and western states of the country. The White House released a statement on Monday regarding the COVID-19 crisis saying, "it (coronavirus) has spread tremendously in both rural and urban areas, entering a new phase. " At the same time, the indicator of the daily increase in the incidence rate still does not fall below the 60 thousandth mark.

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All this suggests is that the current recession in EUR/USD is in the nature of a correction after a significant increase last week. From current positions, one can consider buying with the first target at 1.1800. If we consider a longer time period, then the target here may be more ambitious which is at 1.1880 (the upper line of the Bollinger Bands indicator on the daily chart). If it is overcome, buyers of the pair will enter the 19th figure again.

Irina Manzenko
Analyst InstaForex
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