21.10.202112:33 Forex Analysis & Reviews: Another Covid outbreak may bring demand back to dollar

Demand for risky assets remained stable on Wednesday as the US stock market recovered and optimism for a continued bullish rally soared, thanks to stimulus measures to support the economy.

But risks have risen because COVID-19 infections are again increasing, especially in the Euro area, where only a little part of the population has been fully vaccinated. Unsurprisingly, authorities brought back quarantine restrictions in the hopes of attenuating the situation.

One of the first countries to impose another lockdown is Latvia, driven by the rapid increase in infections with the Delta coronavirus strain. It had the highest infection rate in the world last week. Not only will bars and shops close, but a curfew will also be implemented along with the resumption of social distancing measures.

Meanwhile, Estonia already announced that it will follow Latvia if the situation there gets worse. Romania, on the other hand, turned to the World Health Organization for help.

The situation in Bulgaria is not much better. The government already limits the number of people who can visit restaurants, shops and galleries. Some schools will also close shortly. But even with a sharp rise in infections, hundreds of people still rallied yesterday, calling on the health minister to step down. They also accused the government of violating labor laws.

According to some experts, the problem is that the governments of the former communist wing of the EU cannot convince their citizens of the benefits of vaccination - and this is with the observed jump in daily deaths.

This worsening situation suggests that the action of the ECB - not abandoning the bond purchase program and providing support to the economy until March 2022 - is correct.

Talking about economies, the International Monetary Fund (IMF) reported that China is on track to grow at around 8% this year, and then slow significantly in the coming years. Economists have already cut their forecasts amid weaker growth in recent months.

As for the Asian region as a whole, the IMF warned of a deepening discrepancy between countries with high vaccination rates and countries that lag behind. This, like in the Euro area, will drag the current strong growth of the Chinese economy down.

With regards to other macroeconomic statistics, Eurostat reported that September CPI of the Euro area rose 3.4% m / m, but fell 0.3% y / y. Core inflation, meanwhile, jumped 0.5% m / m and soared 1.9% y / y.

Most likely, growth was driven by the sharp 17.6% rise in energy prices. And among other components, food prices, alcohol and tobacco rose by 2.0%, while prices for non-energy manufactured goods rose by 2.1%. Service prices also jumped 1.7%.

In Germany, Destasis reported that PPI grew 14.2% y / y in September, after rising 12% in August. This is the highest rise since October 1974, when prices rose by 14.5% during the first oil crisis. The data also showed that the index increased 2.3% m / m.

The European Central Bank also reported that the current account of the Euro area fell to € 13 billion in August, from € 23 billion in July. The positive balance of trade in goods amounted to € 17 billion.

Technical analysis on EUR/USD

The pair is currently stuck in a sideways channel, the middle of which is 1.1645. As such, everything depends on whether bulls successfully induce a breakout at 1.1670, because only by that will the pair jump to 1.1700 and 1.1740. Meanwhile, a drop to 1.1620 will put pressure on the pair, which will lead to a further decline to 1.1600 and 1.1570.