Current Currency Climate

Oct 13, 2020

Current Currency Climate
The currency markets have been fairly quiet in recent days, although some trends are beginning to emerge. The U.S. Dollar Index for December has been under pressure for some time now. Although the greenback has seen some minor rebounds, it has been trending lower and may remain under pressure as long as the Federal Reserve continues its current policy of ultra-low interest rates and unlimited quantitative easing measures.

The greenback did stage an upside breakout recently from a trading range it had maintained since early August. The upside breakout proved to be false, however, as the currency quickly came under renewed pressure near the 95 level and rapidly declined back into its previous range, ending up near 93. A breakdown below the recent swing lows around 92 could potentially set the stage for a sharp and significant leg lower that could see the dollar index test the 90 area. A further decline below the 90 level could put the dollar on track for a major decline lower. There may be little standing in the way of the index reaching as low as 80 in the months or years ahead.

The Euro, on the other hand, has been mostly sideways for the last few months. The shared currency recently broke down below the 1.18 level and appeared to be breaking out of its previous trading range. That breakdown did not last long, however, as the currency rapidly rebounded back above the 1.18 level and into its previous range.

Looking to the upside, the 1.20 region in the Euro appears to be a key area of resistance. A breakout above this level could pave the way for the currency to move sharply higher, and the Euro could rally several hundred points before taking a breather and finding some selling pressure. Although the long-term trend in the Euro remains lower, the market is getting close to neutralizing that trend and possibly changing trends to point higher.

The Yuan has also been a subject of discussion. The Chinese Government recently, in fact, relaxed rules on trading of the Yuan, specifically making it easier to “short” the currency, or to bet against a rise in value. This move comes after the Chinese currency hit a 1.5 year high against the dollar.

There is no major U.S. data set for release this week, so action in the currency markets may be fairly subdued. Currencies may see expanding volatility and price swings, however, as the upcoming Presidential election approaches.

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