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26.05.2020 09:29 PM
EUR/USD. Bulls are hungry: China faded into the background, euro grows on Sassoli's statement

After some hesitation, the euro-dollar pair jumped, breaking more than 100 points in just a few hours. In fact, the bulls won back last week's losses, when the price fell to the seventh figure. However, the downward impulse was expected to fade - sellers in May already tested the support level of 1.0790 several times, but could not gain a foothold below. And the last attempt also turned out to be a failure - buyers quickly seized the initiative, and only a surge of anti-risk sentiment prevented them from settling in the 10th figure. Traders were careful both with purchases and sales at the beginning of this week. Firstly, Monday's economic calendar was virtually empty, and secondly, the United States celebrated Memorial Day, so the US trading floors were closed. Today, market participants returned to the machines after a long weekend and reacted to the events of the past days. As it turned out, these events were not in favor of the dollar.

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First, the overall anti-risk sentiment in the foreign exchange market has declined, despite the ongoing political conflict between the US and China. The notorious Hong Kong issue has become another "bone of contention" between the two superpowers. Chinese parliament members are likely to review and pre-approve the Hong Kong National Security Bill before Thursday, which will strengthen the influence of mainland China in this administrative unit. Washington in response has already threatened Beijing with another package of sanctions, but, most likely, Xi Jinping will be unshakable in this matter. Nevertheless, the demand for protective assets, and especially for the dollar, has declined significantly.

In my opinion, this is due to several reasons. First, Trump, in his recent speeches, has vaguely commented on the Chinese theme, focusing mainly on criticism of Joe Biden. This is probably due to the fact that the Democratic leader is confidently ahead of him in the national rating (and even increases the gap). Whatever it was, but so far the head of the White House prefers not to focus on the Hong Kong issue.

Secondly, according to most experts, the political conflict will not prevent countries from fulfilling the terms of a trade deal concluded at the end of last year. Further negotiations, of course, are still in question - it's hard to imagine that under the current conditions the parties will begin to discuss the second stage of the agreement. But on the other hand, even before the coronavirus crisis, many were confident that the country would conclude the next deal after the US presidential election. Therefore, the fate of the second part of the agreement does not yet concern the market participants.

The decline in anti-risk sentiment was also helped by news from the coronavirus front. According to the latest data, the number of new pandemic victims in the world is declining. Over the past 24 hours, 1,200 people have died from COVID-19 - this is the lowest rate in recent years. Previously, this sad indicator did not fall below three thousand a day (the day before, the number of victims was 3,000, on May 24 - 4,000). In addition, many European countries have begun to relax quarantine measures in recent weeks - some states in the United States do the same. From July 1, Spain is ready to accept foreign tourists. In anticipation of summer vacations, the German government also plans to lift the travel ban in more than 30 European countries. In particular, from June 15, German citizens will be able to re-visit the EU states, as well as Switzerland, Liechtenstein, Norway and the UK. In addition to the widespread weakening of quarantine, pharmaceutical companies continue to declare successes in the issue of creating a vaccine - in fact, now the only question is who will be the first to come to the finish line.

In other words, the current fundamental background allows traders to show increased interest in risky assets - including the euro. Indeed, in addition to the vulnerability of the dollar, the pair is growing due to the "independent" strengthening of the single currency.

Let me remind you that last week Berlin and Paris proposed creating a fund for the restoration of the European economy with a total volume of 500 billion euros. This idea was perceived differently in Europe: for example, the countries of the south (in particular Spain, Italy, Greece) supported this initiative. Brussels (in particular the head of the European Commission, the head of the European Parliament) and the chairman of the ECB also expressed their support. The main opponent of Merkel in this matter was Austria. In Vienna, they stated that they did not support the idea of Germany and France, therefore, together with three other EU countries (Denmark, the Netherlands and Sweden), they prepared an alternative proposal involving the issuance of loans instead of subsidies.

But, apparently, this initiative will not be supported by the European community. In particular, today President of the European Parliament David Sassoli criticized the "thrifty" countries. He said that now "is not the time for hard thinking, but for reconstruction", adding that "otherwise we will find ourselves in Europe moving at different speeds." This is a rather clear signal to the opposition, because, in addition to Sassoli, the Merkel plan is supported by the main political players in Europe. All this suggests that political heavyweights will be able to convince representatives of Austria, Denmark, the Netherlands and Sweden to support the German-French initiative.

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However, despite the fundamental background favorable for the euro, it is not worth rushing to make purchases. The pair has now approached the borders of the 10th figure, and here buyers need an informational push to overcome the resistance level of 1.1010 (the upper line of the BB indicator on the daily chart). Without informational support, the pair could retreat to the bottom of the ninth figure. Therefore, to confirm the upward medium-term trend, the bulls need to gain a foothold above 1.1010, which will allow them to rise to the next resistance level of 1.1070 (the upper border of the Kumo cloud is on the same timeframe). Accordingly, long positions are relevant after passing the above price barrier.

Irina Manzenko,
Analytical expert of InstaForex
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