EURUSD, GBPUSD, USDJPY
Weekly Forex Analysis
(July 27 - July 31, 2020)
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US Dollar Fundamental Outlook: USD Plunges as US Braces for a Severe Q2 Contraction
After several weeks of quiet trading in the Fx market, the action seems to be getting busier in the midst of summer. Despite a quiet calendar last week, the dollar fell by the most since May, driven by geopolitical and COVID-19 factors.
The resurgence of coronavirus cases in the US is not stopping, and individual states continue to impose lockdown measures, even months after the pandemic started. By now, it’s clear that the US has mishandled the corona crisis, which stands out as the culprit behind the dollar’s decline. Economists now expect the US economy to contract much more severely in Q2 than other major economies, and the subsequent recovery is also forecasted to be weaker.
The preliminary GDP on Thursday will show the real picture for Q2. Forecast numbers are greatly varying between -15% and -40% decline, so this report is likely to induce volatility on the release based on the lack of a clear consensus. If the GDP numbers are really bad, then the USD would likely extend the decline from last week.
The Fed also meets on Wednesday. They are likely to be dovish with the risks are titled toward aggravating USD losses, if, for example, the Fed lays the groundwork for more easing via negative rates or yield curve control.
Euro Fundamental Outlook: Historic Deal on €750 Bln Recovery Fund Fuels EUR Rally
EU leaders finally approved the €750 billion recovery fund last Tuesday after lengthy weekend talks. Bringing the EU a step closer toward fiscal union, the Council agreed on the package to include €390 billion in grants and €360 billion in loans, which will be borrowed by the European Commission.
The easing of lockdown measures and the containment of the second COVID-19 wave across Europe is another factor that is supportive for the euro currency. The Eurozone is forecasted to see a stronger recovery from the corona crisis and is set to outpace the US, making the euro a preferred choice for investors. The cocktail of the good prospects for the economic recovery with the positives of European political unity
in these challenging times is making the euro one of the most attractive currencies at the moment.
Of course, things can turn around quickly, especially in such uncertain times and when a pandemic is the main cause of that uncertainty. For now, though, investors all but don’t care and are focusing on the positives, fueling the euro rally further. The fundamentals are supportive, and the euro should stay firm. However, positioning warns that we should be cautious with the EUR rally from here, and if nothing else, consolidation would be healthy at this
point.
The EUR calendar features German GDP on Thursday and Eurozone GDP on Friday. The preliminary (flash) CPI inflation reports will be released at the same time on Friday.
EURUSD Technical Outlook:
EURUSD broke the 1.15 resistance last week and is now making a significant test of the major resistance trendline that goes back as far as 2008. This trendline has held throughout the years on four distinct occasions. The main question on traders’ minds now is, will the bulls finally crack it on the fifth attempt?
A supportive factor for an upside breakout is that the bullish price action has gathered momentum. On the other hand, the resistance is heavy, and the RSI is nearing the overbought area on the weekly chart.
Note that this resistance trendline is standing near the 1.17 level, but because it is of such long-term significance, the resistance area is quite large and can extend up to 1.20 based on the monthly chart. Hence, careful trading is recommended around these levels, and although EURUSD may push further higher, it may come down just as quickly later.
To the downside, the former resistance at 1.15 would now be support.
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