The US dollar – as reflected by the US dollar index (DXY) – is advancing 0.36% this morning at 93.69 ahead of today’s meeting of the Governing Council of the European Central Bank (ECB) as the reintroduction of lockdowns in the continent could push regulators to increase the levels of monetary stimulus.
Today’s positive performance seen by the greenback would make this the fourth straight green session, as the North American currency keeps surging on the back of a risk-off attitude from market players amid a resurgence of the virus in key nations within Europe.
Most major currencies including the euro, the pound sterling, and the Australian dollar are losing roughly 0.3% against the greenback during early forex trading activity as traders predict that more fiscal and monetary stimulus will be needed for the region now that lockdowns have been reintroduced – although to a lesser extent compared to March.
On the other hand, although a faltering economic recovery in Europe could prompt the ECB to take further measures, traders also believe that rather than making any decisions on that front now, the ECB is likely to provide a signal of what may come during November and December.
Edward Moya, senior market analyst for Oanda, said: “Europe’s deteriorating outlook due to COVID-19 has turned the spotlight on the [European Central Bank] and that is sending the euro into freefall”.
That said, the greenback’s advance is somehow capped as the Federal Reserve could also take a similar approach by expanding its already massive balance sheet amid what could be the third wave of the virus in the United States – with cases already reaching record levels in the past few days.
Moreover, yesterday’s sell-off in equity markets around the world could help lift the greenback as well as a result of the typical flight-to-safety trade – especially if more losses are to come in the next few sessions ahead of the election.
What’s next for the US dollar?
The chart above shows how the latest price action seen by the US dollar index has pushed the benchmark above a falling wedge formation that can be traced back to March’s highs and lows, with both trend lines serving as support and resistance multiple times in the weeks that followed.
This move could be the starting point of a bull run that might lead to the retest of a long-dated lower trend line – the purple line.
This confluence is very interesting since the possibility that the greenback could climb back to that previous upward trend line could signal that traders believe that dollar still holds value against its peers despite the recent debasement, as European authorities will be forced to push for more stimulus to contain the fallout of another wave of lockdowns.
That said, the MACD is climbing to positive territory once again, although a clear buy signal has not yet been sent by the oscillator.