Euro / dollar forecast: out of the market

The dollar is losing its position as a defensive asset after Fed chief Jerome Powell said that ultra-soft monetary policy has settled in for the long haul. The dollar index, as calculated by Bloomberg, has fallen to its lowest level since May 2018. At the same time, net long positions in the euro currently account for 92% of all open (net) speculative currency positions, according to Scotiabank calculations.

Is it worth it to keep on shopping in the EURUSD pair or can it turn into a loss now? Nikolai Dudchenko, an independent financial analyst, answered Fortrader magazine's question.

- From a fundamental point of view, the macroeconomic situation in the USA and Europe continues to be difficult. During the last week the preliminary data on the US GDP for the second quarter was published - the decline amounted to 31.7%. Characteristically, the index was even better than expected - economists forecasted -32.5%. The Consumer Confidence Index from the Conference Board, which turned down in July, in August confirmed the downward trend, amounting to 84.8 points. The CB survey showed an increase in both those who think business conditions have worsened and those who see deterioration in the labor market. And the saddest part is that, judging by the poll, consumers don't yet see any reason for improvement in the short term.

But here's the question: will such pessimistic sentiment lead to a decline in consumer demand, and more specifically, how trustworthy can one be in such surveys nowadays? For example, data released on the real estate market showed an increase of almost 14% in new home sales for July. Durable Goods Applications also rose (up 11.2% in July). Thus, the measures taken by the Fed to provide additional liquidity in the market, coupled with low interest rates and the regulator's rather liberal stance on a possible rise in inflation are doing their job. No matter what your mood, the show must go on. Here's your money consumer - consume....

Things are not so simple in Europe either - the latest data on consumer confidence and business climate have also shown a slowdown, but the July retail sales data will not be seen until September 3 and something tells us that the growth will not be as strong as in the States. Comparing the M1 monetary aggregates in Europe and America, the money supply is growing faster in the U.S. During July, M1 growth in the U.S. was 1.5%; during the same period, M1 growth in the Eurozone was less than 1%. As a consequence, markets are favoring the euro over the dollar. Add COVID (according to data from Johns Hopkins University the US continues to successfully lead in the number of infections), unrest in some states and the upcoming elections we actually get devaluation dollar vs euro.

I must say that I still expected something different, namely that the dollar would be rather seen as a kind of "defender" and, as a consequence, it would grow despite a number of negative factors, but the market has its own opinion about it.

How will the situation develop now? For now, I think that in the medium term it is better to continue to remain out of the market on the EUR/USD pair - There are too many uncertainties. Speculative work can be based more on technical indicators.

Technical picture on the EUR/USD pair: at the moment the corridor of price movement has shifted upwards. Resistance level is at 1.1970 (August highs), support is at 1.1700. A breakdown of the upper boundary of the price channel will take us to 1.2100. Breakdown of the lower boundary will mean a return to 1.1500.