The dollar has all chances to continue its growth. The US stock market has a corrective decline


World markets end the week on a minor note, which manifested itself in a correctional fall in stock markets, both in Asia, Europe, and in the United States. Along with the prices for commodity assets, and a local strengthening of the US dollar.

What is the reason for such market behavior?

Several overriding factors are responsible for this dynamic. First, the stock market is negatively affected by the slowdown in the recovery process of China, Europe, and the United States after the coronavirus pandemic hard hit. The resumption of the active phase of the political and economic war between Washington and Beijing, which was once again initiated by Donald Trump this week, has already led to a noticeable correction in stocks in America, where the shares of technology sector companies were hit hard. Following them, the downward pressure spread to other stock market sectors, which affected the DOW and S&P 500 indices’ behavior.

The second reason was the dash of the hopes that the Congress would endorse the $ 300 billion bailouts on Thursday. Against this background, the demand for shares of companies fell, which was the reason for the downward reversal of stock indices. The Democrats’ outright war with Trump remains negative for the growth of the local stock market.

Another important event took place in the outgoing week – the ECB meeting on monetary policy. As expected, the regulator did not change anything in the monetary exchange rate and in her speech, its director Christine Lagarde actually announced that the bank would not take any measures soon aimed at lowering the euro rate. This, in my opinion, is a good opportinity for growth. The only factor that can restrain its increase is the fall in demand for risky assets (company shares) since the single currency movement since 2009 is perceived by investors as an indicator of demand. In other words, if the shares of companies are bought, it means that the euro is growing against the US dollar.

British currency’s behavior was quite interesting on Thursday, which by the end of the week, became an outsider in the Forex market. Earlier, the pound followed the euro, but it flew away on Thursday, not even trying to first rise together with the euro against the dollar. The main negative for the British currency is the situation around Brexit. By the end of this year, the transition period ends, which, according to a preliminary agreement between London and Brussels, was supposed to regulate trade relations between Britain and the EU but this was never done. The British have not been able to develop an acceptable plan that would suit both sides, which poses a severe threat to the general process of civilized divorce. Investors began to fear that this problem could not be resolved, which means that at the end of the transition period, the EU will introduce all the WTO rules and regulations in trade relations with the UK, which will definitely hit its economy and the exchange rate of the national currency.

Assessing such prospects and the extremely short period for reaching a compromise, I believe that pound will resume its fall, primarily against the dollar, which will receive support against the background of a possible continuation of the American stock market’s correction safe-haven currency.
With this scenario, we can expect an increase in demand for the yen and the Swiss franc. The Australian, Canadian, and New Zealand dollars may also come under pressure.

thoughts and Conclusions

Summing up the week, let me say that the United States currency managed to keep the upward trend, which is manifested in the dynamics of the ICE dollar index. Continued negative sentiment in the markets will lead to the strengthening of the dollar and correction in the American stock market.

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By Maksim FXbro