US stock indices rallied ahead of the US presidential election, brushing off the negativity of recent weeks and betting that the results of the presidential election will be announced on Wednesday.
Against this background, the greenback retreated from the monthly highs reached earlier in the region of 94.3 points.
Recent opinion polls show that Democratic candidate Joe Biden continues to lead the race for the presidency, beating Republican Donald Trump by 10 percentage points.
Although the basic scenario, according to experts, is a victory for Joe Biden, investors may be waiting for pitfalls, including delaying the announcement of the results due to early voting, as well as a potential challenge to the election results.
At the same time, analysts do not exclude a repetition of the events of twenty years ago, when the winner was announced only on December 12.
If Biden wins the race, the dollar is expected to weaken, while Trump's victory, on the other hand, will help strengthen the US dollar.
If the case goes to court, it could increase the likelihood of a political crisis in the US. The market will react to this by increasing demand for a safe greenback and a depreciation of the EUR / USD rate.
The focus of investors' attention this week is also the next Fed meeting, which will be held on November 4-5.
Most likely, the regulator will refrain from announcing additional incentive measures, but will leave the door open for adjusting the bond purchase program later (possibly already in December). In addition, the Central Bank may once again declare that it is the fiscal policy that is now the most effective tool against the background of uneven economic recovery after the recession caused by the COVID-19 pandemic.
After reaching its highest levels since 2002 after the outbreak of the coronavirus, the USD index then rallied down, in part due to expectations that ultra-low interest rates would persist in the US for an extended period. Recently, the dollar has managed to strengthen slightly, but it is still trading 9% below its previous peak.
What will happen to the dollar next?
The bearish scenario reflects the pressure from the US double deficit and the growing Fed balance sheet.
Proponents of this point of view assume that the USD decline cycle has already started, and it doesn't matter who wins the upcoming elections. According to them, due to its weakening, the dollar serves as a kind of shock absorber for the national economy.
The alternative scenario implies much higher-than-expected US domestic growth driven by additional fiscal stimulus and a rebound in consumer deferred spending.
In particular, Longview Economics experts, argue that the greenback may surprise the bears given the size of the surplus savings of American households. The company estimates that this figure increased by more than $1 trillion during isolation.
"The United States has the potential for sustainable recovery once the COVID-19 pandemic is over or a vaccine against the virus is available. Instead of worrying about a double deficit in the US, investors should pay attention to the more powerful factor supporting the dollar - a combination of sustained growth and higher yields," experts say.
Troubled prospects for the euro:
The euro corrected last week following a decline in other markets. The weakening of the single currency was also the result of the worsening epidemiological situation in the EU. Due to the next surge of COVID-19 in the region, more and more countries are forced to reintroduce restrictive measures.
There are fears that the second wave of quarantine restrictions in the Eurozone will be followed by another economic downturn, which will call into question the solvency of the countries of the South and the willingness of the countries of the North to finance further support measures, as well as the viability of the currency bloc in the long term.
However, in anticipation of the results of the presidential elections in the United States, investors seemed to have forgotten about the ongoing COVID-19 offensive and new lockdowns in European countries.
After a six-day decline, the EUR / USD pair touched a monthly low on Monday at 1.1620. On Tuesday, the dollar came under pressure and the major currency pair was able to recover to 1.1700.
Greenback ended the previous week with a rise of more than 1%, and players seem to have decided to take profits in anticipation of the first results of the US presidential elections, which will be announced on Wednesday.
"EUR / USD has dropped to lows since late September, but support at 1.1612 held out. Growth attempts are likely to fade in the 1.1680-1.1715 area. Above is the 55-day moving average near 1.1783, and as long as the pair is trading below this level, its mood will remain bearish," strategists at Commerzbank said.
