The euro/dollar pair is trading in a wide 150-point range this week, reacting to fundamental major events. Thus, macroeconomic reports have faded into the background – the tone of trading is set by other factors. The focus is primarily on the situation with the new strain of coronavirus, as well as negotiations around the prospects of Brexit. These topics continue to determine the level of anti-risk sentiment in the market, thereby determining the level of demand for the US currency.
At the moment, the panic among traders has slightly cooled down. The US dollar index declined, while a cautious interest in risky assets arose in the market. The EUR/USD pair was no exception: Buyers took the lead during the Asian session, slowly recovering lost points. On the wave of the downward impulse, the bears could not pull the price below the level of 1.2100, so it is quite natural that the pair is now trying to return to the level of 1.22. So far, the fundamental background contributes to this, although the overall market situation is still unstable.
The market participants initially called the situation with the new COVID-19 strain "unsettled", since events were unfolding so rapidly that the market did not have time to properly comprehend what was happening: Boris Johnson announced a new threat over the weekend, while the European Union was actually isolated from Britain on Monday. This was after admitting that a new strain has been discovered in 5 EU countries. However, there are not much details about the updated COVID-19, except that it is more contagious. Initially, experts could not clearly answer the key question about the effectiveness of vaccination in view of new coronavirus mutations. Therefore, investors' panic was quite justified.
But fortunately, the overall picture of the current situation has slowly been getting clear. The new strain is indeed more infectious (by 50-70% of the usual COVID variant) and is more often recorded in children, but at the same time, it yields to those vaccines that have already been developed and are used in some countries. As experts explained, there is a concept of "dose" in virology: when a small amount of a virus enters the body, it does not have time to contact the receptors, and the person does not become infected. However, the new strain (VUI-202012/01) does it faster – roughly speaking, a person needs less of the notorious "dose" of this strain to catch COVID. At the same time, scientists assure that the new strain will not affect the effectiveness of the vaccine.
To simply put, the coronavirus can spread faster, but this threat has been somewhat leveled given the fact that mass vaccination has already begun in the United States, and it is about to begin (tentatively - next week) in Europe. Amid such news, currency markets are gradually recovering, at least major stock indexes in the Asia-Pacific region rose 1.2% today.
On the other hand, long positions in the EUR/USD pair still look risky, although the same can be said about sales. The US dollar, as a protective asset, is in investors' field of view in connection with the uncertain prospects for Brexit. This is a kind of "time bomb" that can explode any time, provoking a surge in anti-risk sentiment, and, consequently, an increased demand for the US dollar.
Rumors surrounding the prospects for a trade deal between London and Brussels are controversial. Unfortunately, traders are forced to rely mainly on unofficial information, since official comments lack details. Insiders voice more information, but its reliability is doubtful. For example, the journalists of the ITV TV channel stated this morning that the parties are literally one step away from signing the deal – the parties allegedly can shake each other's hands before the end of Wednesday, although Reuters wrote last night that the fishing issues remain the main hindrance. According to journalists, this information was announced by EU's chief negotiator, Michel Barnier, to the EU representatives following the results of yesterday's negotiations.
At the moment, no one can say with certainty how Brexit will end, since any forecast is based on subjective assessments. Let's say, in my opinion, the parties still make a deal, but it will be done either tomorrow (before Christmas day), or next week – that is, at the last moment. There are many prerequisites for the British to eventually compromise on the fishing issue, opening the way to an agreement. However, it should be noted that this is just a subjective assessment of the situation.
The situation still remains unsolved. If the pressure swings towards the conclusion of the deal, the euro will receive significant support, as the market will increase interest in risky assets. Otherwise, dollar bulls will take the lead again, returning the EUR/USD pair to the base of the 21st figure. Thus, the indicated pair's fate in the medium term depends on Brexit. The "British mutant" factor has already been used in many ways, so traders focused on trade negotiations.
On the one hand, it is currently best to take a wait-and-see position for the pair, since the pressure can swing in any direction (the latest optimistic rumors should not be trusted). On the other hand, assessing the insider information of many influential publications (in particular, the Financial Times), it can be assumed that the parties will come to a compromise decision at the last moment, announcing their readiness to conclude a trade deal. Therefore, the US dollar will not be in favor if you enter the market, excluding short-term time periods. The first upward target is the level of 1.2273 (two and a half year high that was reached last week). The main target is located above it, which is around 1.2310 (upper line of the Bollinger Bands indicator on the daily time frame).
