empty
 
 
05.03.2021 12:38 PM
Dollar reigns supreme in Forex

The reality is that the ECB's influence on financial markets is limited. The Fed's lack of concern about the rapid rally in Treasury yields is causing even bigger sell-offs in securities. Technology stocks, which were the leaders in growth in 2020, look particularly overvalued and, accordingly, vulnerable. The correction of the S&P 500 and Nasdaq Composite brings the US dollar back to life.

The first week of spring kicked off with a powerful weapon attack by the ECB, whose representatives not only expressed concern about the growth of European bond yields but also argued that the central bank can and should intervene to limit this process. Nevertheless, the euro strengthened, and at the end of the five-day period began to fall, although chief economist Philip Lane said that there is no need to panic. What is the reason? Despite the rise in bond rates, financial conditions in the eurozone remain favorable for economic recovery, so there is no reason to worry about a rally in bond yields.

Dynamics of rates and financial conditions in the euro area

This image is no longer relevant

Thus, even though the ECB meeting seems to be a key event in the second week of March, and investors will actively discuss whether the regulator will signal an expansion of the emergency asset purchase program, in fact, the main drivers of EUR/USD growth should be sought outside the eurozone. Particularly in the US, on their $21 trillion treasury bond market.

According to Fed Chair Jerome Powell, he could be concerned about the panic in the financial markets and an excessively rapid rally in rates, but so far he does not see all this. Well, investors can continue to test the Fed's strength. According to the global Purchasing Managers' Index, Treasury yields have room to grow. I wonder what the head of the central bank will say if the indicator for 10-year securities rises above 2%?

Dynamics of US bond yields and models based on global PMI

This image is no longer relevant

The hotter the sell-off in the US securities market, the higher the rates rise, the wider the yield differential between US and German bonds becomes, according to which, under normal conditions, it is possible to accurately predict the dynamics of the EUR/USD. If in 2018-2019 the divergence in monetary policy was pushed into a corner by trade wars, and in 2020 - a pandemic, now this driver of exchange rate formation on Forex is showing itself in full glory.

The development of a correction for the main currency pair looks like an objective reality, and even the absence of ECB concern about the situation in the eurozone debt market will not stop the bears on EUR/USD. The question is, is the upward trend broken? I don't think so. With the UK reaching a 30% vaccination rate by April, and the EU by summer, risk appetite will return, forcing the US dollar to go on the defensive. In the meantime, we must admit that it rules the ball.

Technically, a Broadening Wedge pattern was formed on the EUR/USD daily chart. An upward correction followed by rebounds from resistances at 1.199, 1.204, and 1.208 should be used to sell.

EUR/USD, Daily chart

This image is no longer relevant

Marek Petkovich,
Analytical expert of InstaForex
© 2007-2024
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST
  • Chancy Deposit
    Deposit your account with $3,000 and get $8000 more!
    In March we raffle $8000 within the Chancy Deposit campaign!
    Get a chance to win by depositing $3,000 to a trading account. Having fulfilled this condition, you become a campaign participant.
    JOIN CONTEST
  • Trade Wise, Win Device
    Top up your account with at least $500, sign up for the contest, and get a chance to win mobile devices.
    JOIN CONTEST
  • 100% Bonus
    Your unique opportunity to get a 100% bonus on your deposit
    GET BONUS
  • 55% Bonus
    Apply for a 55% bonus on your every deposit
    GET BONUS
  • 30% Bonus
    Receive a 30% bonus every time you top up your account
    GET BONUS

Recommended Stories

Can't speak right now?
Ask your question in the chat.
Widget callback