The dollar begins a new chapter of growth

The dollar begins a new chapter of growth

The US dollar is up 0.75% against the euro and 0.5% against a trade-weighted basket of developed country currencies. The euro took a hit after the trade agreement between the EU and the US. The agreement shifts the balance of cash flow towards the US, which benefits both the dollar and the stock markets. At the same time, there has been a noticeable sigh of relief driven by growing confidence in the future, albeit tempered by the unpredictability of the US president.

The agreement with the EU is an important milestone in a series of trade deals. Perhaps the only thing left is to polish up the agreement with China. This means that markets are now able to switch to trading based on expectations of trade flows, rather than simply operating in risk-on/risk-off mode.

It is also worth remembering that a series of trade agreements during Trump's first presidential term created demand for the dollar and stock markets. The first rounds of trade wars in early 2018 saw the dollar index hit three-year lows, but it turned to growth in the second half of April of the same year.

This year, we saw a similar sell-off of the dollar and stock indices, both in anticipation of and in response to trade disputes. Now, we hope that a new chapter is beginning, leaving the most heated disputes behind. The currency market is also opening a new chapter with a different balance of power – in favour of the dollar.

Moreover, there are technical prerequisites for this. The DXY touched the oversold zone on weekly timeframes from mid-April to the end of last month on the RSI index. Now, a divergence has formed here, which is an important basis for a rebound or a global reversal.

The growth potential of approximately 10% in the next 4–6 months roughly corresponds to what we saw in 2018. In this case, the DXY will return to the 105 area with the EURUSD falling to the 1.04–1.05 area. We do not rule out the possibility of further advancement of the dollar to 110–114 on the DXY and 0.98–1.02 on the EURUSD during the year if the decline in the euro to 1.05 and the ECB's policy easing are not enough to restart the eurozone economy.

By the FxPro Analyst Team