The dollar market scares or encourages? A glance at USD.

Many ask themselves: is this the end of a dollar streak? Almost everywhere you hear about the overvaluation of the American currency and with each stronger downward move to the detriment of the USD, the end of its appreciation in the broad market. However, this is not the case in the long term. What is the reason? Why do investors not react to tragic data from the US labor market? This question would like to be asked by anyone who could potentially make money from these moves. In this brief analysis, we will look at selected pairs with the dollar, the actions Federal Reserve and the US employment market.

Preliminary results without reaction

Thursday's preliminary data from the US labor market are one of the most important and interesting readings illustrating the state of the global economy. Interest has clearly dropped from PMI indices for employment-related publications. Importantly, despite the importance of this data, it does not observe significant movements on pairs with the dollar. Approximately 5,2 million applications for unemployment benefits have arrived since last readings. If we add them all, we balance around 20 million. The unemployment rate increases similarly to the dollar against most currencies. Where does this anomaly come from? This question should be answered, among others, in recent US Federal Reserve moves.

Where is the Reserve pumping money?

Giant aid programs that are pumped into the US economy, as you can see, perfectly mask poor data. Unemployment is just one of many areas that has problems, but it is quite loud about it. The situation on the housing market is equally uninteresting, where building permits are falling rapidly from month to month. Publications directly related to industry record a decrease by a few percent in m / m terms. Recent data show a regression of over 5%. Retail sales look similar, with recent readings of over 8% decline (m / m). Undoubtedly, it is a strong allergic reaction to a virus raging in the United States. However, most investors are counting on the improvement and containment of a strongly growing trend of cases. Restrictions that are now increasingly being introduced in the US cast a light of hope for at least a slight flattening of the curve.

The aid programs that the Fed had already offered at the beginning of the epidemic were loud at the beginning of March. The current adding to the furnace somewhat masks the above economic difficulties, which are presented by subsequent readings of macroeconomic indicators. The corporate bond market gained more "quiet" support in the form of greater liquidity. So far, the Fed's activities have focused mainly on buying government and local government debt. Now the Federal Reserve has shed some strength towards more "commercial" bonds with not very good rating. The market will get a kind of kick in the form of an injection of cheap money. In addition, corporate loan pools create an interesting investment environment. 

Of course, such a lot of help pumped into the market has its end, which is closer (unknown) to us. However, I dare say (looking through the prism of the Federal Reserve) that this spring, despite numerous announcements, will slowly start screwing the tap. The masking effect, which was achieved by the information about the planned programs alone, brought the intended result. Reserve policy should now focus on a more effective investment of funds that it allocates to support the economy. The aid that flowed to small and medium enterprises turned out to be insufficient.

Overview of currency pairs

We will of course focus on the most popular pair in the dollar, i.e. EUR / USD. The beginning of April maintained slight optimism on Eurodollar prices. From the point of view of technical analysis, this week the averages created the first downward signal. The market did not break new peaks, and the course fell slightly stagnant. The temporary depreciation of the dollar, looking through the prism of the current situation, was a weekly correction. EUR / USD looks really interesting in terms of taking a short position. There are practically no confirmations of the increasingly weaker peaks. Rather, the demand for EUR in this pair has been exhausted.

Chart EUR / USD, H4 interval. Source: xNUMX XTB xStation

The second pair we consider is the equally interesting pound. The GBP / USD is currently close to the significant level of 1,24835. We are currently observing a slight demand response, which is likely to burst soon. The 10-period average is no indicator of a potential trend. Nevertheless, it can be seen with the naked eye that there was a significant overestimation of the pound. To a large extent, quotations will be driven by subsequent macroeconomic data. Due to their unpredictable nature, it is worth carefully observing market reactions in the coming weeks and maintaining great vigilance and caution with the current volatility.

Chart GBP / USD, H4 interval. Source: xNUMX XTB xStation