The EUR / USD pair opened the week with a small bullish gap and reached maximum levels since March 17 amid growing traders' positive sentiment associated with the restoration of economic activity around the world amid the gradual removal of restrictions due to COVID-19.
When there is too much optimism in the market, good news is received with a bang, and bad news is ignored, you involuntarily start to think about whether it is time to curtail positions.
US stock indices continue to grow, despite the most severe subsidence of the national economy since the Great Depression, rising unemployment in the direction of 20%, as well as pessimistic forecasts by the Congressional Budget Office. The CBO believes that in 2020 the US economy will shrink by 5.6% and it will take years to recover.
However, the S&P 500 rally is only part of the solitaire played by the EUR / USD bulls.
Against the backdrop of financial market turmoil, investors were forced to turn to defensive assets, primarily treasuries and greenbacks, however, as leading economies open, money begins to flow in the opposite direction.
The USD index has been declining over several consecutive trading sessions, and the yield on thirty-year US government bonds has reached its highest level since March 20.
At the same time, tensions between Washington and Beijing persists. According to Bloomberg, China ordered state-owned companies to stop purchasing US agricultural products. This raises concerns that a trade deal between the two largest economies in the world could be in jeopardy.
The euro is strengthening thanks to the Franco-German plan to save the EU economy, a statement by the European Commission on the issuance of bonds worth € 750 billion, as well as expectations that the ECB will expand the emergency program for the purchase of assets by € 500-750 billion. It is assumed that in this situation the yield on Italian government bonds will be reduced, as well as their spread with German counterparts, which will save Eurosceptics from unnecessary illusions.
Along with the expansion of QE, the European regulator may announce the purchase of so-called fallen angel bonds, as well as the process of reinvesting income from acquired assets for many years.
Although fiscal and monetary incentives are pushing the EUR / USD pair to trade in an upward direction, the factors that have pushed the euro down over the past two years are still valid. Namely, trade disputes, cautious markets, and weak hopes that economic growth in the eurozone will be more dynamic than in the USA.
In addition, the Franco-German plan has not yet been approved, and the ECB's caution may play a trick on the EUR / USD bulls. This circumstance, along with the escalation of the trade conflict between Washington and Beijing, may trigger a profit-taking process. In the meantime, the main currency pair does not abandon attempts to continue growth.
The key reversal level for short-term traders is now at 1.1165. A pure breakdown of this barrier will allow the bulls to aim at 1.1200 and further at 1.1235–1.1240.
The nearest strong support is at 1.1100 and further at 1.1075. Breakdown of the last level can cause long compression and accelerate the decline in the direction of the 200-day moving average in the area of 1.1010.
