The US dollar seems to have been weakening steadily in recent months, and the scale of the USD sell-off accelerated earlier this week as the Fed is not going to raise interest rates or talk about the possibility of reducing QE despite high inflation in the US.
Even before the outbreak, from early 2018 to March 2020, the US dollar was on a definite upward wave, which meant it was strengthening. During this period, under Donald Trump's presidency, there was talk of the USD's strength being a reflection of the strength of the US economy, and America becoming 'great again'. During this period, the EUR/USD fell by just over 15 percent, to USD 1.06.
Then came the pandemic hit to the market and the dollar continued to lose value month after month, with EUR/USD reaching 1.2340. This marked a 16 percent increase from the March 2020 low.
Since 2016, the quotes of the main currency pair have remained in consolidation between $1.05 and $1.25. Currently, the market is near the upper barrier.
What, in turn, may indicate that the EUR/USD exchange rate may once again turn back to $1.10 or lower, creating about a 10% decline? Well, this seems to be indicated by the positioning of investors in the euro futures market, whose change in behavior and skepticism about the EUR strengthening may cause them to close long positions and buy back the US dollar. In 2018, when the EUR/USD exchange rate was at 1.25, non-commercial investors held about 150,000 net long positions in the EUR futures market (net positions represent the difference between contracts bought under a rise in the value of the euro and those assuming a fall in the value of the euro), according to CFTC commission data and a COT report. In contrast, in August 2020, when the EUR/USD was at 1.20, which is much lower, there were more than 211,000 net long positions - the most in the history of the reports.
This may mean that speculators were very keen to start gambling on the rise in the value of the euro and the weakness of the dollar, but they failed to take the rate above the previous highs, which may mean that demand capitulated. Moreover, between August and December 2020, EUR/USD rose from $1.20 to $1.23, with positioning dropping from 211k to 165k. This, in turn, could be interpreted as taking profits in a rising market and exiting positions at the peaks.
Such changes in the attitude of institutional investors may significantly influence the further behavior of the main currency pair and an attempt to go down to USD 1.10 in the following months should not be ruled out.
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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