Expectations of a vaccine and assurances from the Federal Reserve to support the U.S. economy seem to improve sentiment in the broad market, but may weaken the dollar.
The AUD/USD pair is at its highest level for 3 months, while the NZD/USD pair is at its highest level for 30 months, and the EUR/USD pair has risen to the levels recently observed in September, approaching 1.1950. As a result, the U.S. dollar index futures contract seems to be increasingly close to the levels recently observed in May 2018. The zloty may also gain on the wave of this wide USD sell-off. The USD/PLN exchange rate fell to its lowest level in over two months, testing potential support of 3.73 PLN.
The publication of the minutes of the last meeting of the U.S. Federal Reserve, held on November 4-5, shows that the Fed is committed to continuing to support the U.S. economy with all the tools at its disposal.
The Fed noted that both economic activity and employment have improved, but that the further development of the US economy will depend largely on the epidemic. Thus, the Federal Reserve has assured that it will be able to pursue an even more accommodative monetary policy when needed. It can do so by increasing the scale of purchases or by purchasing more bonds with longer maturities. The Fed also has the ability to make changes in the duration of the asset purchase program without changing its size or structure.
The decision-makers added that they would first want to reduce QE before raising interest rates. Currently, the Fed buys US$120 billion of treasury bonds and mortgage-backed securities every month. The range for federal funds' rate is still 0-0.25 percent.
In the context of the U.S. dollar, it is worth noting the positioning of institutional investors on futures contracts. At the end of September, according to the report of Commitments of Traders, the lowest level for net long positions was reached, equal to -9146 contracts. Since then the value started to grow to 741 contracts. Nowadays it seems that even if the price fell below the last low, it would be difficult to break through the low in positioning. In other words, there may be few investors willing to play for a further drop in USD. If a divergence between positioning and price were to arise as a result, it could mean that the dollar could soon start making up for losses.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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