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03.08.2022 11:20 PM
EUR/USD. Consequences of the "Taiwan crisis" and good news from ISM

The euro-dollar pair is still in the range of 1.0110-1.0280, within which it has been trading for the third week. Amid Tuesday's events around the resonant visit of the Speaker of the Lower House of the US Congress to Taiwan, EUR/USD bears tried to develop a downward movement, but stalled around the support level of 1.0160 (the middle line of the Bollinger Bands indicator). However, if we talk about the prospects of the upward or downward movement, this is not so important. After all, in order to reverse the situation in their favor, bears/bulls need to make a significant price breakthrough, which will clearly indicate the priority of the price direction. So, for the development of the upward movement, bulls need to settle within the third figure, overcoming the resistance level of 1.0300 (the upper line of the Bollinger Bands indicator on the D1 timeframe). To talk about the development of the downward movement, the price should go below 1.0100, and ideally - 1.0050. Therefore, the current price fluctuations within the above range should be treated skeptically.

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If we look at the weekly EUR/USD chart, we will see that in mid-July, the pair pushed off from a 20-year price low of 0.9953, after which it rose by more than 200 points. But the corrective impulse faded in the area of the 3rd figure. Bulls could not even test the upper limit of the Bollinger Bands on D1 (1.0300), not to mention overcoming it and consolidating the above target. After that, the pair actually drifted in anticipation of the next information impulse.

The previous day's geopolitical events failed to stir up the pair. The dollar was in high demand as a protective asset, but, fortunately, the worst-case scenarios predicted by the media did not materialize: China reacted very restrainedly to Nancy Pelosi's visit to Taiwan. The press drew apocalyptic pictures: starting from military actions against the Taiwanese army and ending with a direct clash between the United States and China. Some hotheads even predicted the beginning of the Third World War. The worst forecasts did not come true: Beijing limited itself to conducting military exercises around the island and blocking the import of citrus fruits and frozen mackerel. It should be noted here that these products make up only a part of Taiwan's total exports to mainland China. While the most sensitive areas of trade relations have not changed. For example, Beijing did not apply a block on the import of processor chips.

In other words, the "Taiwan crisis", which provoked a real hysteria in the world media yesterday, has passed the culminating phase. Pelosi left Taiwan safely today, and now Beijing can only wave its fists after the fight. Naturally, the political consequences of the events will be felt for a long time – especially if Chinese leader Xi Jinping retains the posts of General Secretary of the CPC Central Committee and President of the People's Republic of China in the fall. But if we consider the situation "in the moment" and through the prism of the prospects for the behavior of dollar pairs, then we can say that traders have turned over this chapter. Interest in this topic will return only if China accelerates the process of reunification with Taiwan through military action.

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In other words, the foreign exchange market has switched to "standard" fundamental factors on Wednesday, and the EUR/USD pair is no exception here. For example, traders reacted to macroeconomic reports that were published in the United States. In particular, the ISM index of business activity in the services sector jumped to 56.7 points in July (with a forecast of growth up to 53 points). I would like to note that this indicator has been consistently declining over the past three months, and July was supposed to be the fourth in this list. Therefore, the positive dynamics of this indicator pleasantly surprised dollar bulls: the US dollar index came to life and jumped, reflecting the increased demand for greenback.

Another report also turned out to be in the green zone, which reflects the change in the volume of production orders in the United States. It jumped to 2.0%, the strongest increase since July last year. At the same time, experts expected to see it at a 1% level.

In addition, the dollar follows the yield of 10-year treasuries, which just reached 2.810% (a two-week high). Apparently, confidence is gradually returning to the market that the US Federal Reserve will continue to tighten monetary policy at an aggressive pace in order to curb the growth of inflation in the country.

And yet, despite the dominant bearish sentiment on the EUR/USD pair, it is quite risky to open short positions near the lower limit of the 1.0110-1.0280 range. In my opinion, shorts on corrective pullbacks within the aforementioned price range look much more reliable. For example, if you roll back to the intermediate resistance level of 1.0240 (Kijun-sen line on D1), you can consider short positions with targets like 1.0190 (Tenkan-sen line on the same timeframe), 1.0150 (the middle line of Bollinger Bands on D1) and 1.0110 (the lower limit of the established price range).

Irina Manzenko,
Analytical expert of InstaForex
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