Optimism in the FX market is back on its track as the COVID-19 pandemic had been stabilized thanks to extreme mitigation methods. Recently, positive news regarding Remdesivir, an antiviral drug developed by Gilead Science, had shown that it could be effective in speeding the recovery of patients infected with SARS-COV-2. That lead to a spike in stocks and at the same time, it supported risk currencies like Euro or Pound.
Dollar funding pressures ease
With a positive mood in the market, the USDX, or the US dollar index eased below the 100 psychological area, showing that funding pressures have eased in the short-term. The US dollar did not collapse with the Fed cutting rates, but it erased some of the gains, following extraordinary monetary policy measures.
However, the dollar remains strong as compared to most of the other reserve currencies (Euro, Yen, or Pound) and nobody can’t guarantee all the bad things are behind us. It is true that FX pairs like EURUSD or GBPUSD found bids in the past few days, but this pandemic is a once-in-a-century event, which comes with tremendous implications for the global economy.
Aside from the economic damage, social unrest, geopolitical risks, and a de-globalization trend will be things to consider in the next few months. The virus continues to spread with European and North American nations already starting to ease restrictions.
What could go wrong next?
As specialists have been warning, loosening the lockdown too fast could pose some serious risks, since it could spark a second wave of infections. With a vaccine still in development, humanity is vulnerable. Social distancing measures could be maintained for an extended period, in case new infections surge once the economic activity starts to get back to normal.
FX traders should start to build a forex trading schedule for periods when volatility will spike again because risks to the downside had eased only temporarily. Markets are betting on a V-shaped recovery, but the reality could be completely different. China is the first country to had got rid of the pandemic, but the data it provided had proven to be unreliable. We must wait and see how Western Countries will perform once people will start to move again.
The bottom line is that a lot of optimism is already built into the market valuations and if the reality will fail to impress, we should expect the US dollar to surge again and other currencies to weaken.