During the Asian session, the US dollar index remained at the border of 90th and 91st figures. In addition, major dollar pairs showed weak volatility, reflecting consolidation.
In particular, the EUR/USD pair was trading in a narrow price range around the level of 1.2050. This is because its buyers failed to enter the area of 1.20, while sellers cannot decline below 1.2000. Thus, there were only unsuccessful attempts this week. In other words, the US dollar is behaving irresponsibly towards those investors who were expecting the dollar rally to develop. However, as soon as the 10-year Treasury yield stopped gaining impulse, the US currency lost its driver and drifted. Now, market participants are waiting for the Senate's political debate, J. Powell's speech and tomorrow's release of the US labor market data. Everyone is well aware that these factors can change the fundamental picture not only for the main dollar pair, but also for the other pairs of the major group.
Meanwhile, the current situation allows the safe dollar to feel quite confident. If we outline from the risks of today's speech of the Fed Chairman and tomorrow's release, and consider the situation right now, we can conclude that the greenback is logically holding its positions.
As an example, Wall Street stock indices continue to mainly show "red' color. The US stock market closed lower yesterday, with the Dow Jones falling by 0.39%, the S&P 500 down by 1.31% and the NASDAQ Composite by 2.70%. At the same time, the VIX Volatility Index, which is based on S&P 500 options trading, increased by 10.5%, leaving the area of 20-20 to reach 26.7. This indicates high volatility in the stock market and the corresponding turbulence.
On the other hand, the yield on 10-year US government bonds approached the 1.5% mark again, that is, to a multi-month high reached last February 2020. The yields on bonds with other maturities showed similar dynamics.
In this context, the US dollar found the strength to hold its positions and even take short-term counterattacks. In a pair with the euro, dollar bulls tried to approach the base of the 20th figure in order to assault the 19th price level again. But still, there is no trace of the downward momentum that was observed last week.
Traders clearly need a new information driver that will shift the situation – not only in the currency, but also in the stock and debt markets. Such a driver could be Powell's speech today, Nonfarm's data release tomorrow, or the Senate's approval of the proposed aid package for the US economy.
It should be recalled that the House of Representatives supported Biden's "American Rescue Plan" a few weeks ago, although more than ten Democrats voted against the initiative. In the Senate, representatives of the Democratic Party can not afford to lose at least one vote of their supporters, so congressmen discussed the details of the strong bill all throughout February.
According to the latest data, the Democrats managed to find a compromise on the most controversial issues. In particular, the congressmen agreed to reduce the number of Americans who will receive direct payments from the state. The new version of the bill says that those US citizens who earn more than 80 thousand dollars a year will not be able to receive additional payments. Previously, this bar was at the level of 100 thousand.
Today, this bill will be discussed in the Senate at approximately 17:00 (Universal time). But despite the compromise among Democrats, the aid package is unlikely to be approved on Thursday. The representatives of the Republican minority warned that they would delay the process of reviewing the draft as much as they are allowed by the regulations. In particular, one Republican senator said that he would insist that the entire bill, consisting of hundreds of pages, be read to the Senate at the beginning of the debate (and not just the headline, as is usually done). According to preliminary estimates, this will take about 10 hours. The debate itself will also take from 5 to 10-15 hours.
Nonetheless, the resonant bill will most likely be approved, and it's only a matter of time. The very fact of its adoption can cause additional volatility in the currency market, as well as in the stock and debt. However, we don't know whether this volatility will be on the side of the US dollar, since the market may continue to adhere to risky assets.
Jerome Powell's speech today may also turn out to be not in favor of the US currency. It should be noted that the Fed has not yet hinted at a possible targeting of the government bond yield curve, contrary to the ECB, whose representatives reacted very aggressively to the growth in bond yields. But if the Fed's head hypothetically voices such a probability, the situation may significantly change.
Moreover, we should also consider the release of February Nonfarm tomorrow, which can similarly affect the position of dollar bulls. According to general forecasts, the number of employed will only rise by 130 thousand, and the unemployment rate will rise to 6.4% amid a weak increase in the average level of wages. So, if the real figures do not coincide with it, the US dollar will be under pressure.
Given the current fundamental background, it is better to take either a wait-and-see position or a risk with long positions, as short ones on the EUR/USD pair look very risky due to the number of "unknowns" in the current equation. The first upward target is set at the level of 1.2110 (Tenkan-sen line on the daily time frame), while the main target is still the level of 1.2200 (upper line of the Bollinger Bands on the same time frame).
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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