The Dollar Continues to Underperform as COVID Continues to Spread

November 23, 2020 | AtoZ Markets – Two major themes are driving the currency markets during the penultimate month of 2020. The first is the spread of COVID. The Pandemic spread is not slowing down especially in the United States where a lame-duck President has decided not to focus on COVID-19.

The positivity rate in the United States has hit a multi-month high of nearly 10%, according to Johns Hopkins, which means that 1-10 people who get tested test positive. The 7-day moving average of the number of COVID-19 cases in the US hit a fresh all-time high above 145,000, according to the COVID Testing Project. The daily number of deaths in the United States has moved above the July highs, which does not bode well for US economic output.

The increase in the spread of the pandemic is likely to lead to the need for additional stimulus which could put downward pressure on forex trading of the US dollar.

Brexit Might be at Hand

The second major theme has been that newswires are reporting that a Brexit deal is at hand. According to reports from the Sun, UK negotiator David Frost told Prime Minister Johnson that a deal could be agreed by next week. Both the UK and the EU appear to have found enough common ground that a deal could be afoot.

While the timeline is tight, it needs to be accomplished ahead of the EU’s special parliamentary session scheduled for December 28. There are no details about which direction the talks are going. The passage of a deal would take a heavy weight off of the UK and the EU. This would put upward pressure on both currencies and therefore downward pressure on the US dollar.

US Economic Data is Mixed

The spread of the coronavirus has been putting downward pressure on the greenback. It has been one of the worst-performing currencies in the second half of 2020. US short-term yields remain pegged near zero and the Fed could increase its stimulus in the next few months.

US fiscal stimulus is likely to move forward with a new administration which would mean more borrowing by the US government. The House is asking for a 2.2-trillion stimulus plan, which if passed, would weigh on the greenback. Recent data including jobs data and retail sales have missed expectations.

Technical Analysis of the Dollar

The dollar has moved lower as the yield differential has moved against the greenback, weighing on the currency. The price action is forming a weekly bear flag pattern which is a pause that refreshes lower. Support is seen near an upward sloping trend line that comes in near 92.20. Resistance on the dollar index is seen near the 10-week moving average at 93.22. In May the 10-week moving average crossed below the 50-week moving average which means a short-term downtrend is now in place.

Short-term momentum is negative as the fast stochastic recently generated a crossover sell signal. The current reading on the fast stochastic is 22, just above the oversold trigger level of 20. Medium-term momentum is neutral as the MACD (moving average convergence divergence) histogram is printing in positive territory with a flat trajectory which points to consolidation.

The Bottom Line

The outlook for the dollar is not positive over the short-term. A vaccine that is nationwide could buoy US economic output, but before this occurs the virus could run wild. The US will need to push for additional stimulus which will put downward pressure on the greenback. The technicals are negative as momentum builds near long term support. With a Brexit at hand, the upward momentum on the pound and the euro could be the nail in the coffin for the US dollar.

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