The currency market was in a state of euphoria on Monday as major currency pairs showed unusual volatility (especially the USD/JPY, USD/CHF, and USD/CAD pairs), reacting to the latest news from the field of pharmacology. The US Pharmaceutical company, Pfizer, has announced significant progress in the development of a vaccine against coronavirus. The third phase of testing showed that the developed drug protects against COVID-19 in 90% of the studied cases (in total, the vaccine was tested on 50,000 volunteers).
Against this background, traders saw a light at the end of the tunnel, amid widespread pessimism, lockdowns, and a record increase in the number of covid infections around the globe. Stock markets around the world reacted with rapid growth. In particular, the shares of many low-cost airlines and aviation holdings soared. For example, the shares of the manufacturer of aircraft engines Rolls-Royce rose by 45% on Monday. Almost the only outsider was the Zoom audio and video conferencing platform – its shares fell by almost 14%. Netflix shares showed similar dynamics.
In the foreign exchange market, the main beneficiary of this situation was the US dollar. The dollar index soared from 92.170 to a high of 92.850 in just a few hours, reflecting demand across the market. But it is worth noting that the euro in this confrontation actually held back the blow. Despite the onslaught of bears, the EUR/USD pair did not leave the area of the 18th figure and showed a relatively modest decline (for example, the yen against the dollar weakened by almost 300 points).
This "stress tolerance " of the currency pair is explained by several factors. First, the greenback's performance against the euro was limited by the demand for risky assets. Second, the dollar eased its pressure on the back of a significant decline in the yield of 10-year treasuries (to 0.91% from a 5-month high of 0.97%). Well, in the end, we must not forget about the political factors that still affect the mood of dollar bulls.
It should also be noted that such emotional price impulses are usually fleeting. The situation on Monday was no exception where at the end of the US session, the greenback began to lose ground. The general euphoria has passed, but the current problems remain: the realization has come that the world will not change overnight, even if there is a vaccine that is de facto still under development.
The third stage of clinical trials has not yet been completed. Pharmacologists are still collecting information about the safety of the drug. Also, the vaccine has yet to receive approval from the US Food and Drug Administration. The said developed drug is difficult to use – it must be stored and transported only at ultra-low temperatures, and two injections are required to achieve the desired effect. All this suggests that the mass distribution of the vaccine around the world is an extremely difficult task that has yet to be solved.
Given these nuances, vaccination of the population may not begin until the first decade of next year. This fact was also recognized by US President-elect Joe Biden in "Joe Biden's path to victory: five days in five minutes" where he noted that the vaccine, even if approved, will not be widely available in the coming months.
Meanwhile, the coronavirus continues to gain momentum. In the US, the total number of infected cases as of Monday already crossed the 10 million mark. According to the US media, one of the first priorities of Joe Biden as President-elect will be the introduction of a Federal mandatory mask regime. Partial lockdowns are also considered.
In other words, the anticipated mass vaccination is still far from being done. That is, in the prospects of the next six months (at least), while the second wave of the pandemic wrecks havoc in some parts of the world. Against the background of this seemingly obvious conclusion, the dollar suspended its growth and lost its positions in many pairs. Including and in a pair with the euro, where buyers have already seized the initiative.
In my opinion, the EUR/USD pair retains its growth potential in the medium term, although this growth may be limited: the "ceiling" of the price range corresponds to the resistance level of 1.1910 (the upper line of the Bollinger Bands indicator on the daily chart). EUR/USD bulls can test this target on Tuesday, especially if the indices of business sentiment in Germany and the EU (from the ZEW Institute) come out better than expected – or at least at the level of forecasts.
It is also worth noting that on Wednesday, November 11, the trading platforms of France and the US will be closed in light of the observation of Armistice Day in France, and Veterans Day in the US. This may put additional pressure on the greenback, as many traders will fix profits in dollar pairs on the eve of the said holiday. Therefore, after the release of data from ZEW, you can consider long positions, unless, of course, the published figures drown the single currency.