The American currency is close to completing the week with its maximum rise in a month.
The rise of the second wave of the coronavirus outbreak in Europe and the lack of progress on a new stimulus package in the U.S. have boosted demand for safe assets. Thus, the USD index climbed to a two-week high of 93.9 points.
In light of the grave coronavirus crisis in Europe, several countries, including Germany, France, and the UK, have announced new restrictive measures in an attempt to slow the outbreak.
The US midwest is also grappling with a record rise in new coronavirus cases, while macro data indicates a slower recovery in the US economy. The number of jobless claims in the U.S. jumped to 898,000 last week, which turned out to be worse than expected, while manufacturing activity in New York fell more than expected.
At the same time, attempts to propose further stimulus to the US economy is bogged down in trilateral negotiations between the White House, Senate Republicans, and House Democrats.
"There are still significant disagreements between all parties that should play a role in the agreement, and the market's assumption that the deal will take place sooner rather than later is questioned," said Global Investments.
"Investors fear a slowdown in economic activity as new cases of the virus rise. The deterioration of the situation is observed practically throughout Europe, which is a serious blow to the dynamics of recovery and increases deflationary risks," said ANZ strategists.
European countries are trying to avoid imposing restrictions at the national level, but the measures already taken are putting pressure on economic activity in the region and the common currency.
EUR / USD bulls are struggling to hold the important support at 1.1700. If they succeed, the pair could recover to 1.1750-1.1760. Otherwise, it risks sinking to 1.1680 and further to 1.1630 and 1.1610.
Meanwhile, the first day of the EU summit failed to please fans of the sterling. EU leaders said they were not ready to make concessions to conclude a deal with London. UK's Prime Minister, Boris Johnson does not intend to conclude a trade agreement on current terms. In this regard, French President Emmanuel Macron and German Chancellor Angela Merkel urged Johnson to re-examine the situation as the absence of a deal will hit the British economy the hardest.
The pound has lost about 1% this week and was last seen at $1.2912.
According to some estimates, the pound sterling will lose 1.7-4.7% against the US dollar and 1.5-4.4% against the euro if the UK decides to leave the EU without a trade deal. On the other hand, the conclusion of the agreement will cause the sterling to rise against both the dollar and the euro. However, any rally in the pound will be limited by the fact that the UK economy is already facing new restrictions due to the coronavirus and the Bank of England may impose negative interest rates.