A new week begins in the foreign exchange market. The last seven trading days have confused all the cards in your hands. Although we allowed a decline in the pair's quotes and a strong strengthening of the dollar as part of a downward technical correction against the 11-month upward trend or at least against the last 2-month round of the upward movement. However, after testing the 50.0% Fibonacci level and the lower Senkou Span B line, we thought that the correction would be completed and the upward trend would resume. However, in practice, the bears unexpectedly became more active at the end of February and began to put pressure on the euro/dollar pair. The main reasons for this were strong macroeconomic statistics from America, as well as strong growth in US government bond yields. The second factor, from our point of view, looks very doubtful. We have already said that everything looks as if the market has found a convenient explanation for what is happening. First, Treasury yields didn't start rising yesterday or a week ago. It has been growing since the beginning of August 2020. The growth has accelerated in recent weeks, however, it also accelerated not yesterday or a week ago. Therefore, it is unclear how the fact that the US dollar started strong growth a week ago is related to the fact that Treasury bond yields have been rising for 6 months. Secondly, the yield of European government securities is also growing, but for some reason, no one is trying to link this fact to the movement of the euro currency. It should be noted in general - the growth in the yield of government debt securities in conditions when many countries of the world and their central banks have poured tens and hundreds of billions of dollars into their economies, this is normal. The economy is saturated with liquidity, money is taken from nowhere, so according to all economic laws, we should expect an increase in inflation. It is the growth of inflation that investors are waiting for when they refuse to buy ten-year bonds because of low-interest rates. This percentage determines the profit of investors, however, there are serious concerns that inflation in 2021 will jump up and exceed the 2% mark. But Jerome Powell and the company do not intend to reduce the key rate until the labor market fully recovers. And this phenomenon is not expected until mid-2022. Thus, inflation will not be limited by raising the key rate, and this is even more frightening for long-term investors. Simply put, if inflation exceeds the bond yield rate, then investors will not receive any profit on these bonds. They will receive losses. Therefore, few people now buy treasuries, so the yield rates are rising to attract new investors. What does this mean for the US dollar? If the demand for bonds is low, then the US dollar is low, as none of the international investors are in a hurry to buy dollars to buy government securities. Domestic investors also do not invest in treasuries, so the money supply and demand also do not change. Therefore, the phenomenon of the increase in the yield of treasuries is not so much in line with the strong strengthening of the US currency.
However, next week, all the attention of the market will again be focused on this factor. Here it is necessary to understand the correlation that has arisen. An example is bitcoin. Cryptocurrency becomes more expensive by 5-10 thousand dollars per day from just one tweet of Elon Musk. Is this logical? No. But it works. The same is true now for the euro/dollar pair. The growth of the US dollar-based on the growth in bond yields, which began 6 months ago, is not entirely logical, but does it work? It's still working. Therefore, during the next week, this factor will have to be paid attention to. But there will be an unprecedented lack of macroeconomic statistics next week. On Tuesday, the European Union will publish the volume of GDP for the fourth quarter in the second estimate. However, traders are already ready for the value of -5.0% y/y and -0.6% q/q. On Wednesday, the United States will publish an inflation report, and experts believe that this indicator will grow from 1.4% y/y to 1.5-1.7% y/y. So far, the growth of the consumer price index can be regarded as a positive phenomenon. On Thursday, the results of the ECB meeting will be summed up, but no changes in the monetary policy parameters are expected, so the most important event of the day will be the ECB press conference. On Friday, the eurozone will publish an indicator of the change in industrial production for January. Thus, in general, only two events can be noted during the week: the US inflation report and the ECB press conference after the meeting. And these events are not a fact that will have an impact on the euro/dollar pair. Thus, most likely, other fundamental factors will influence the movement of the pair. As we have already said, this may be a factor in the growth of the yield of 10-year treasuries or it may be a factor in the infusion of another $ 2 trillion into the US economy as a new stimulus package, which was approved this weekend by the US Senate. Thus, in the coming weeks, a huge amount of money will be sent to the US economy, which will necessarily affect the supply of the US currency in the markets. This may not happen immediately, but these 2 trillion dollars will have an impact on the market and the dollar exchange rate.
Trading recommendations for the EUR/USD pair:
The technical picture of the EUR/USD pair on the 4-hour chart shows that the new downward trend continues, but has the status of "strong". And strong movements usually do not last long. Now there is no crisis or acute situation in the world, as it was, for example, in March last year. Therefore, there are no special reasons for panic. Consequently, the downward movement of the euro/dollar pair may be short-term. We have good reasons to believe that the current strengthening of the dollar (its strength and speed) was not completely justified fundamentally. However, as long as the downward trend persists, it is recommended to continue to consider options for opening short positions. The nearest target for the Ichimoku system is the support level of 1.1827.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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