EUR/USD gaps down as investors grow wary of Europe’s second COVID-19 wave

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  • EUR/USD gaps down to start the week as investors grow wary of COVID-19 second wave.
  • Analysts citing plenty of risk factors which would be expected to underpin the US dollar.
  • PBoC intervening in FX trading could underpin USD.

EUR/USD is currently trading at 1.1816, recovering partially from the opening gap down to a low of 1.1808 from 1.1829 and Friday’s close. 
The US dollar has started the week off on the front foot, although remains constructively bearish on the charts according to the DXY’s slide to below the 93.30/50 support area. 

The decline in the greenback is owing to a growing sense of optimism on US soil as investors presume a Blue wave victory in the US elections and subsequent levels of fiscal stimulus greater than what the GOP would wish to draw upon. 

That said, there are plenty of risk factors which would be expected to underpin the US dollar. Analysts at Rabobank cite COVID-19, a contested US election and China relations to name but a few.

”Headlines are packed with plenty of risk factors related to COVID-19, a contested US election and China relations,” the analysts said. 

”This suggests that it is reasonable to ask not just whether the weaker USD is over-extended but whether its softer tone can last given the current complex web of political, social and economic factors and their impact on capital flows.”

Europe’s 2nd coronavirus wave ”is going to be tougher”

In weekend news, which has potentially underpinned the greenback while knocking its biggest rival, the single currency, European Central Bank officials warn of how the surge in coronavirus puts a mark over the economic recovery. 

In an interview with the Wall Street Journal, published earlier today, the ECB’s chief economist Philip Lane warned that “the next phase is going to be tougher” when addressing the second wave of COVID-19.

 “The big question and this is why there is so much uncertainty, is: how quickly can the current dynamic, with rising cases, be stabilised.” 

Record high daily infections in several eastern European countries and sharp rebounds give the sense that the single currency bloc never really crushed the COVID-19 curve as hoped. 

Spain last week declared a state of emergency for Madrid and Italy has warned that the health system was facing ”significant critical issues” while hospitals fill up again. 

This development could be the making of an end to the euro’s rally and potentially, the dollar’s descent if investors start to head for the safe haven again. A phenomenon that lifted the greenback to the highest levels since 2017 at the start of the pandemic in March earlier this year.

PBOC has lowered the reserve requirements

An additional boost for the dollar could well have come from the people’s Bank of China’s weekend decision to lower the reserve requirement rate on some yuan trading.

The move raises the prospects of continued intervention from the Chiese which could underpin the dollar.

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