For the first time in six days, the US currency gained in value yesterday against other major world currencies, including the zloty. This strengthening, continued today in the morning, could only resemble the correction movement formed after the previous strong trend of weakening USD.
According to information gathered by the Bloomberg agency, the current strengthening of the dollar may be caused by the increased demand for the currency from corporations and large international funds, which is characteristic for the end of the month and the quarter. It may, therefore, be a one-off factor contributing to the temporary appreciation of the dollar. The broad USD gains may be supported also by the Fitch agency which downgraded the UK rating from AA to AA- with a negative outlook. The rating agency drew attention to the uncertainty regarding trade relations with the European Union after Brexit and the aggressive budgetary response of the United Kingdom to a pandemic, which could be alarming, but may help the economy survive and, more importantly, help it recover once the virus has gone. The pound has plunged, which has benefited, among others USD.
In the broader horizon, it seems that there will be enough dollars on the market. Through its operations: QE, repo and reverse repo, the Fed may freely shape the supply of the American currency and maintain the necessary liquidity on the market. Investors would not have to buy USD at ever-higher prices. Under this assumption, the US currency may depreciate, which may also be indicated by investors' behavior on the dollar index futures market.
Along with the recent increase in contracts for USD index above 100 points, the speculators did not open a lot of new long positions. Thus, it could be concluded that the dollar was already too expensive to buy it so high in large quantities. As a consequence, significant divergence between the futures and positioning appeared. History shows that such divergences may change market trends in the long run. History may or may not repeat itself this time about the US dollar.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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