Sharp correction of the US dollar, what is going on in the markets? For now it is only a correction, the dollar remains around the lows and the dollar forecast (also useful for understanding the current general economic period and how the markets could evolve) indicate a sideways phase around the lows, but with different dangers that could lead to a strong risk off.
After hitting new lows, the dollar last week had an upward correction: from the Dollar index lows to 92.48, it has rebounded for now to 93.70. The USD forecast do not indicate any reason for movements in favor of the dollar that are not just corrections, due to the current oversold condition and divergences contrary to the main trend; however, a short period of pullback and recovery of the American currency may start. But for something more structural, we will have to wait for a drop in gold and at the same time a fall in the stock market, which instead does not seem to want to know how to go down, especially in the US.
USD forecast: laterality in August, but pay attention to the risk off
Be careful, though: August is a dangerous month for forex trading, often in the past it has shown much higher volatility and movements linked to a decrease in liquidity due to the summer period.
In this August 2020 there are US-China tensions to keep up, with the acquisition of TikTok by Microsoft and Trump who would like to ban TikTok from the US territory, for reasons of national interest and security. Furthermore, we must not forget that in the US the pandemic does not stop, while in Europe many outbreaks of Covid, which are bringing some cities to close their main activities again.
In short, there are the conditions for a return of the risk off, we cannot deny it, even if so far the market has proven to have the strength to withstand the impact of any negative news, due to the very high liquidity provided by central banks.
Dollar forecast: two dangers are looming over markets
There are in particular dangers related to the speculative bubble that can be generated in the system and to a moral hazard probably greater than the interventions of the Lehman period of 2008/2009. If the two dangers were to materialize in some way, then the risk off on the dollar could become something far more important.
For now we remain suspended in this limbo of sideways around the lows, as if waiting for something that does not arrive, firm and with the equity also stable near the highs. It does not go up because obviously the bubble is feared, but it does not go down either because there is no trigger yet, there is no trigger effect that causes the explosion of aversion.
We will see, surely we have entered the right period to see an increase in volatility and price action. Let’s get ready.