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The dollar collapsed. Is it worth buying the euro and the pound?

The dollar collapsed. Is it worth buying the euro and the pound?

There is a noticeable correction in the dollar, as a result of which the indicator has decreased as much as possible since the end of March 2020. On Thursday, the greenback tried to win back part of the sharp pullback, but the bullish attempt seems to have failed, the indicator met stiff resistance in the area of 113.80.

The corrective decline may continue towards the weekly low at 109.35, and then go to the area of 108.41.

As for the broader outlook, while the dollar index is trading above the support line of 107.10, the upward trend remains relevant.

The policy of the pound played an important role in the corrective decline of the dollar. The Bank of England announced the purchase of bonds instead of the planned sale.

The scale of purchases is not limited, while the time period is stipulated – until October 14. Sales have been postponed until October 31.

The GBP/USD pair has grown the most over the past few months ahead and in the near future the pound may show some stability. However, it is likely to be temporary. According to HSBC forecasts, the GBP/USD quote again risks facing further downside risks.

The unexpected collapse of the pound, which occurred recently, may end there. As a rule, after such a large movement, a reversal in the market follows, but here the situation will depend on many components, in particular on politics. The British authorities will need a lot of strength and arguments to convince the markets of the reversal of the trend in the pound through active and large-scale actions, including by the BoE.

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The dollar collapsed. Is it worth buying the euro and the pound?

Meanwhile, ING believes that GBP/USD will not be able to overcome the 1.0800-1.0900 area. What is happening now is a temporary phenomenon.

"The bears on the pound will remain so, referring to fiscal dominance, since the Bank of England has suspended the planned quantitative tightening, and by buying bonds, it actually provides the government with space to continue an aggressive fiscal program. That is why we see that the Ministry of Finance is making every effort to assure the markets of the independence of the Bank of England," the economists comment.

Thus, the bias in the pound should remain in favor of retesting 1.0500-1.0350.

Wells Fargo economists believe that parity with the dollar is just a matter of time. There will be a historic drop in the next six months.

As for the euro, at the moment it also felt a surge of strength, but most likely short-term, as in the situation with the pound. In order for the EUR/USD pair to extend the recovery, it was necessary to rise above 0.9740 and start using this level as support, which happened on Thursday.

Euro bears will now take a wait-and-see attitude. It is not clear how long it will take. The breakdown of EUR/USD, including the 0.9770 level, will be a signal for the implementation of a scenario implying a quote growth with a target of 1.0025.

Meanwhile, inflation in Europe is moving to double digits. The price level in Germany has exceeded that in the UK and may reach a peak of 13%. In September, CPI inflation in Germany increased by 10% year-on-year, exceeding estimates of 9.4% and marking a sharp jump compared to August's 7.9%.

For comparison, in Britain, this figure reached 9.9% in August, down from 10.1% in July.

The locomotive of the European economy recorded a widespread increase in prices. This suggests that inflation is actively being eaten into and spreading throughout the economy. It looks like the European Central Bank will have no choice but to raise the rate by another 75 bps next month.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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