The US dollar index reached monthly highs, amid continued demand for the US currency. The general nervousness associated with the inauguration of Joe Biden serves as an impulse for the dollar's growth. In addition, the market continues to make use of last week's report about the "Plan to Save America", with a total volume of $ 1.9 trillion.
Such a fundamental background allows the US dollar to gain momentum – including in a pair with the euro, which is under the weight of its own problems (prolongation of lockdowns in key EU countries, political crisis in Italy and slowdown in the main economic indicators). As a result, the EUR/USD pair declined to the mid-20th mark, that is, to almost two-month lows. It also lost 300 points in less than two weeks after reaching a two and a half year price high at the level of 1.2350. But despite such a sharp decline, it is too early to talk about a change in a trend: it can be assumed that we are dealing with a large-scale correction after a multi-week decline in the US dollar and accordingly, the growth of the EUR/USD pair.
The nature of key factors that push up the US currency are emotional: the transfer of presidential power in the US is taking place in an overly tense environment, which is special in the country's recent history. However, this fundamental factor will lose its power in just two days, unless the alarming forecasts of American security officials become a reality. Another important fact is also noteworthy: the yield of treasuries (in particular, 10-year Treasury securities) is declining for three consecutive days, while bond yields' growth was one of the supports of the dollar's revaluation. This circumstance tells us that the strengthening of the US currency should be carefully treated now, since interest in a safe dollar may fade after January 20.
The information flow related to the preparations for the inauguration of the newly elected US president resembles a report from the military fronts: the central part of the American capital was blocked with concrete blocks and metal fences. The city was divided into sectors, with a special regime operating within a radius of several kilometers from the Capitol, emptying almost all the streets. In addition, National Guard troops who will keep things in order are marching into Washington to prevent riots from repeating. It also became known that Trump supporters and representatives of far-right radical movements can hold armed marches in the territory of all 50 state capitals – such information was distributed by the FBI. The governors of Maryland, New Mexico and Utah have already declared a state of emergency in connection with possible riots. National Guard in California, Pennsylvania, Michigan, Virginia and Wisconsin was activated, and in Texas, the state capital was even closed from Saturday until Inauguration Day.
This informational background contributes to the growth of anti-risk sentiment and interest in the US dollar, which is used as a protective tool. It is worth noting that traders even ignored the US retail sales data, which came out in the red zone. In particular, this indicator declined to -1.4% (weakest result since April last year) excluding car sales. All other components were also below zero, reflecting the decline in American consumer activity. In view of this, December's disappointing Nonfarm, inflation's weak release and Powell's "dovish" remarks should be recalled. These fundamental factors should restrain the growth of the US dollar, but the current general nervousness associated with US events is pushing the dollar up across the market.
In terms of the EUR/USD pair, its downward dynamics is due to European events. In particular, traders are mainly paying attention to Italy, where the ruling coalition has collapsed. Over the next two days, it will become clear whether Italian politicians will be able to keep their government or the country will go to early parliamentary elections. Therefore, Italy's Prime Minister Giuseppe Conte will be put to a vote of confidence in the Lower House of Parliament today. He must receive confirmation of the continued support of the majority of deputies, or else his cabinet will be forced to resign. Tomorrow, a similar vote will be held in the Upper House of Parliament (Senate). And if today's voting ends in favor of Conte, then there is still intrigue about the Senate. Considering that Italian politicians fail to keep the government and go to re-election, the euro will be under additional pressure. The continuing intrigue regarding tomorrow's vote in the Senate only worsens the situation, putting pressure on the EUR/USD pair.
On another note, Germany will be deciding this week if they should introduce the so-called "mega-lockdown". Here, the country will stop public transport and impose a curfew. Austria, in turn, announced yesterday that their national quarantine will be extended until February 7. In this case, the rest of the EU countries where quarantine restrictions are in force are expected to make similar decisions in the next few days.
Thus, the current fundamental outlook contributes to a short-term further decline in the EUR/USD pair. It may test the support level of 1.2000 (upper line of the Bollinger Bands indicator in the daily time frame) until January 20. We can consider short positions to this level, as the general panic associated with Biden's special operation for its inauguration will support the dollar bulls. It should also be noted that the United States is celebrating Martin Luther King Day today, so American trading floors will be closed. Therefore, the currency market will start fully working tomorrow.
