The US Dollar Index Resumes Its Downtrend Amid Covid Optimism

Marius Paun | London, UK | Senior dealer | Thursday, 30th July 2020

The US dollar has enjoyed a rally since the beginning of the year as containing a renewed spike in coronavirus infections seemed elusive. Indeed, more vaccines have been approved since Pfizer made the breakthrough announcement in November or are on the way to being approved by the Food and Drug Administration (FDA). However, distributing them and actually vaccinating people looked like no easy task, certainly not one that can be done fast enough.

Nonetheless, there are now growing hopes that more Covid-19 relief could soon be on its way, lately, virus cases fell, more cities came out of the lockdown and at the same time allowed businesses to reopen. As a result, a wave of pent-up demand is expected later in the year which should speed up growth.

Those feel-good factors have pushed the US dollar back down with dollar index retesting support at 90 (US dollar index- a measure of the US dollar against a basket of its major trading partners’ associated currencies the EU, Japan, the UK, Canada, Sweden and Switzerland).

Regardless of the current context, the greenback’s fate will remain closely linked to inflation and interest rates. Bond yields have been on a rise recently which fuelled concerns the US Fed could decide to raise rates sooner than markets anticipated.

Fed Chair Jerome Powell testified before Congress earlier in the week and eased concerns the Fed would tighten any time soon. He’s been saying, for more than a year now, that the rates will likely stay near zero through 2023. While he did not mention any date, he did say there’s no hike in the foreseeable future. Instead, Powell said, the central bank will be focused on getting ‘‘Americans back to work and it is likely to take some time for substantial further progress to be achieved’’.

He also reiterated the Fed would allow inflation to run hotter and longer than usual before doing anything on interest rates and there are no plans to taper asset purchases either. What is more interesting is the re-emphasized that there would be a clear communication of a change in policy before taking any sort of action.

It looks like President Joe Biden’s $1.9 trillion stimulus package could pass within weeks triggering the so-called reflation trade which has pushed the US dollar back down. Labor Department figures showed the $600 checks sent in December fed through the real economy. Retail sales surged 5.3% last month, a record 5 times bigger than expected.

The next round of individual stimulus will be more than twice as large as the last which is likely to speed up the recovery.  That should bode well for the stock markets but the US dollar could remain under increased downside pressure.

 

The chart shows a trend that is clearly trending down, with bears appearing to retake control after a brief pullback. The moving averages are pointing downwards and the short-term MA (red) has crossed below the longer-term MA (blue) once again. In addition, the price is below both MA, all bearish signals.

The current price is just above 90.00 with the next support seen at 89.90, Tuesday’s low. If sellers manage to break through that, next they will undoubtedly target January 6th low at 89.2. On the upside, bulls will be hoping for a pullback to 90.50 followed by a 91.00 – 91.20 handle. It they manage do to break above, more buyers could get increasingly confident the high of 91.58 reached on February 5th is there for the taking. If that hurdle is overcome, the short to medium-term trend will turn bullish.