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05.04.202114:08 Forex Analysis & Reviews: EUR/USD: dollar sets sail to bright future, while euro suffers amid fears of new wave of COVID-19 in the EU

Exchange Rates 05.04.2021 analysis

One of the main events of the past week was the publication of the March report on American employment.

Data released on Friday showed that the US economy created almost a million jobs last month, which it had failed to achieve for seven consecutive months.

The unemployment rate in the country in March fell to the lowest for the year at 6% from 6.2% recorded in February.

Strong payrolls should have led to a sharp strengthening of the US dollar. Although the greenback jumped after the release, the gain was modest. This is largely due to the celebration of Good Friday, and therefore many markets were closed.

The USD index rose by more than 0.2%, following the results of the last five days. On Monday, it is trading near last week's closing levels (around 93.00 points). Many markets are still closed due to the Easter weekend, so trading activity remains weak.

In January-March, the dollar showed its best quarter in almost three years against its main competitors thanks to improved US economic outlook and higher Treasury yields.

According to some analysts, the greenback will continue to strengthen.

"The upward trend in the dollar is very strong. It may be best for investors to follow this trend in the new quarter," said strategists at Mizuho Securities.

USD short positions have dropped to their lowest level since June last year, according to the latest data from the US Commodity Futures Trading Commission (CFTC).

"Not only speculators are now betting on the growth of the dollar, but also asset managers who are cutting their "shorts" in other currencies to free up money for long positions in USD," said Daiwa Securities specialists.

Silicon Valley Bank analysts believe that the trend towards strengthening the dollar against the euro should continue, as the stimulus measures in the US have just begun to exert their influence. They predict that the full effect of stimulus measures will take place six months after they are adopted.

Currently, the greenback remains resilient, trying to capitalize on positive statistics from the United States, which confirmed the prospects for a rapid recovery of the national economy after the pandemic.

The data also raised doubts that the Fed would keep interest rates low for a longer period and pushed the 10-year Treasury yield above 1.70%. This is another positive signal for the dollar.

Meanwhile, the single currency remains forced to defend against the greenback amid fears that the third wave of COVID-19 and related quarantine restrictions in Europe could derail the region's fragile economic recovery amid a slow rollout of vaccinations against the virus.

All this is holding back attempts to recover the EUR/USD pair from the five-month lows reached last week in the 1.1700 region.

The French authorities announced the beginning of the third national lockdown, which will last at least a month. The country's finance minister Bruno Le Maire noted that this measure will hurt the national economy. At the same time, the amount of damage has not yet been indicated. Things are not going well in Germany, where isolation rules continue to tighten. In particular, a curfew is expected in Berlin, as well as an extension of the lockdown until the end of April.

Since the EUR/USD pair cannot develop a significant upside impulse, this indicates the prospects for its decline.

However, the "bears" will probably prefer to wait for a clean breakdown of the 1.1700 mark and only then will bet on the continuation of the decline in the direction of 1.1615-1.1620. Further support is at 1.1600, a breakout of which will clear the way for the pair to test the psychologically important barrier of 1.1500.

Meanwhile, the EUR/USD rally is likely to face strong resistance and could fade around 1.1800. A clean break of this level could trigger a short squeeze towards 1.1860, where the 200-day moving average is, making this a tough nut to crack for bulls.

Viktor Isakov,
Analytical expert of InstaSpot
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