The US currency continues to gain momentum, despite the weak macroeconomic reports that were published today in the US. But the situation with the European currency is mirrored: despite the strong releases (ZEW indices), the euro plunges across the market. Such an abnormal, at first glance, price dynamics is due to very specific reasons, which we will discuss below.
But first, take note that traders of the foreign exchange market are in the waiting mode: on Wednesday, the results of the Federal Reserve's March meeting will be announced. On the eve of this event, the US dollar index is growing by leaps and bounds, regaining lost positions. The indicator again tests the 92nd figure, while the previous attempt, made on March 8, failed: dollar bulls were forced to retreat. This time, the upward trend is explained not only by optimistic expectations regarding the results of the March meeting of the Fed. The market is excited by the "Napoleonic plans" of US President Joe Biden, who decided to review tax policy at the federal level for the first time in three decades. The stated intentions are so ambitious that all other fundamental factors have faded into the background.
In particular, EUR/USD traders ignored the disappointing retail sales report. After a sharp increase in January, the indicators collapsed into negative territory again. Both taking into account car sales and without this component, the indicators showed a negative trend, showing the weakest result since April 2020. The industrial production index similarly collapsed to 11-month lows. Contrary to forecasts of growth to the level of 0.4%, the indicator fell to -2.2%.
But all these releases with a red color did not scare off the dollar bulls. The focus is on the renewed growth in the yield of treasuries against the background of the White House's intentions to review tax policy. According to Bloomberg, Biden will propose to Congress, first, to increase the corporate tax (from 21% to 28%), second - to cancel tax breaks for limited liability companies, and third - to increase income tax for those US citizens whose annual income exceeds the 400,000 mark. In addition, among the Biden administration's plans is to increase the tax rate on the capital gains of millionaires (i.e., for those American citizens who earn at least $1 million a year). According to preliminary estimates of experts, the implementation of such a plan will replenish the budget by 2.1 trillion dollars over ten years.
On the one hand, it is still too early for dollar bulls to uncork the champagne: the information itself is in the nature of rumors, and the implementation of such an initiative requires the approval of Congress. But these little things do not confuse investors, who are confident that the US economy will show spasmodic growth in the second half of this year. Such expectations are also fueled by analysts' forecasts. In particular, according to Goldman Sachs analysts, the US GDP will immediately increase by 8% in 2021. Here it is necessary to recall that according to the Fed's latest forecast (which was announced at the December meeting), the US economy will grow by only 4.2% this year. The rising yield of 10-year treasuries indicates that investors are holding on to a more optimistic scenario. And if tomorrow the Fed revises its forecast in the direction of improvement (according to some estimates, the central bank can raise the bar from 4.2% to 5.5%), the dollar will jump up again - even if all the other theses voiced by Powell will be dovish in nature.
In other words, the greenback, after a few days of reflection, again followed the yield of US bonds. Strong nonfarm, good dynamics of US inflation, the implementation of the 1.9-trillion stimulus package and rumors about tax increases - all these fundamental factors allow dollar bulls to show character, while ignoring the current releases.
The European currency also ignored today's releases - however, in this case they came out in the green zone. Positive dynamics were recorded both in Germany and in the eurozone as a whole. The German index of business sentiment from the ZEW institute has been growing for four months - after the autumn recession, when Europe was covered by the second wave of the coronavirus crisis. The pan-European index shows similar dynamics. But contrary to the optimistic figures, the euro plunged across the market - especially in such cross-pairs as EUR/CHF, EUR/GBP and EUR/JPY.
Vaccination problems continue to put pressure on the euro, while macroeconomic reporting has taken a back seat. Major EU countries, such as Germany, France, Italy and Spain, have announced the suspension of the use of the AstraZeneca vaccine. In total, almost two dozen countries have abandoned it (so far temporarily), of which 15 are EU countries. This factor serves as an anchor for the euro, especially against the background of a rather dovish position of the ECB. By the way, at the last meeting, the members of the European Central Bank directly linked the pace of economic recovery in the euro zone with the pace of vaccination against COVID.
All this suggests that the EUR/USD pair retains the potential for further decline. The first target of the downward movement is located at 1.1840 - this is the lower line of the Bollinger Bands indicator on the daily chart. If tomorrow's Fed meeting is in favor of the dollar (which is very likely, despite the dovish mood of Powell), the pair's bears will easily overcome this target, then head to the bottom of the 18th figure.
