The US dollar shot straight up yesterday, but what was the reason? Such a bullish run was hardly caused by increased demand for safe-haven assets amid the news on a new coronavirus strain detected in the UK. Perhaps, the markets have had enough of buyers' excessive activity, which dragged stock indices up, putting pressure on the dollar.
Meanwhile, the greenback is currently heavily oversold against a basket of other major currencies. Therefore, it needs consolidation at least. It would be great for the dollar to make a slight rebound. The fact that COVID-19 is mutating may act as a long-awaited cause for investors to lock in profits in the stock market, forcing the US dollar index to rebound from lows.
There is one more point that causes some confusion. The dollar shot up on the news about the agreements to stimulate the US economy. What was that? Maybe the fact of supporting the US economy was bought a long time ago. In addition, market sentiment was downbeat due to the gloomy reports about a new coronavirus strain. Apart from that, traders locked in profits amid a decrease in trading volume. What if the markets considered a $900-billion coronavirus relief insufficient for an economic recovery?
One way or another, the US currency has been moving in a slight upward trend lately. This fact changes the balance of power in dollar pairs. In this situation, the pound sterling seems to be an anti-hero. At the end of the year, the British currency is trading under pressure from multiple factors. The negotiations between the UK and EU remain deadlocked, which means a post-Brexit trade deal might not be agreed. Besides, the country has been cut off from the rest of the world amid the spread of a mutated variant of the virus. Moreover, the stronger US dollar has a significant impact on the value of the pound sterling. Despite all this, the British pound is doing rather good.
Thus, by the end of yesterday's session, the pound sterling recouped some losses against the dollar after a strong decline at midday. From a technical point of view, it received support when approaching the 50-day moving average. Notably, it has been a support line in recent months and a signal line for a short-term trend in recent years.
In case the price consolidates above the 50- and 200-day moving averages, this will indicate that buyers are taking the lead. However, the situation may change dramatically. If the pound/dollar pair goes below the 1.3200 mark, the pound's bullish run will be cancelled. Market participants remain cautious as key US indicators are trading between positive and negative territories, and the greenback is trying to seize a chance for a rally.
The pound/dollar pair has gone below 1.34, but this level is still trying to resist.
In the meantime, it is worth taking a closer look at the US dollar index which is struggling to extend gains. Both medium-term and long-term trends have become upward. Long positions on the American currency will be relevant until the price breaks through the 90 level and consolidates below this border. Today, the greenback is trading in a clear upward trend. However, it remains well below its highs hit on Monday after the explosive gains triggered by the news on a new coronavirus strain in the UK.
Despite this recovery, Bank of America believes that "medium-term trends still favour short dollars, short U.S. Treasuries and long commodities".
"The recent dollar index break below 90 supports our view that dollar weakness can persist next year," analysts said.
At the same time, big recent gains in such currencies as the Australian dollar, Swiss franc, and Chinese yuan speaks in favor of a pullback.
"These are warning signs the dollar selloff may take a breather or bounce in the next two to four weeks," the bank added.
Notably, the US dollar has been losing ground for the third quarter in a row. The greenback fell by more than 12% against a basket of other major currencies compared to a March peak.
