During the Asian session on Wednesday, the US dollar index showed positive dynamics, rebounding from two-month lows. The US dollar was in demand as a protective asset amid the escalating conflict in the Middle East, and so, the dollar pairs reacted accordingly. In particular, the EUR/USD pair again failed to break through the level of 1.2170 (upper line of the Bollinger Bands indicator on the daily chart), returning to the range of 1.2100-1.2160. However, the upward trend is still in force in the medium term, despite the temporary strengthening of the US currency.
The US dollar started to form its position last night after Israel was hit by a major rocket attack. The Palestinian militant group, Hamas, launched almost 140 rockets towards the southern part of the country within five minutes, seeking to overload its Iron Dome air defense system. In just one day, more than 600 rockets were fired at Israel from the Palestinian side. According to observers, this attack is the most massive in the last few decades – at least three Israeli civilians were killed. In response, the Israeli military destroyed hundreds of Hamas targets. The Palestinian side also claimed the deaths of civilians.
The escalation of the conflict began in early May, when clashes between Palestinians and Israeli police started in Jerusalem. The immediate reason was the court's decision to evict several Palestinian families from a neighborhood in East Jerusalem. During the clashes in the Old City, in particular on the Temple Mount, several hundred protesters and dozens of law enforcement officers were injured. However, the clashes did not stop there, but became more widespread. The apogee of the conflict was the rocket attack on the territory of Israel. After that, infantry and armored vehicles were sent to the border with the Gaza Strip.
In view of the above-mentioned events, anti-risk sentiment has increased in the currency market. The beneficiary of this situation was the US dollar, which was in demand as a protective instrument. During the Asian session, this currency strengthened its position, especially after the reaction of the world community. So, in the United States and Germany, they said that Israel has a legitimate right to defend itself from rocket attacks. In turn, the Arab League accused Israel of "indiscriminate" strikes on Gaza. According to representatives of this organization, about three dozen civilians were killed in the Gaza Strip. Today, the UN Security Council will hold an emergency meeting to discuss the escalation of tension in the Palestinian-Israeli conflict zone.
On the one hand, the current growth of the US currency is quite justified, given the general nervousness in the currency market, but on the other, this strengthening should be treated very carefully, especially in the context of the EUR/USD pair. As a rule, such fundamental factors do not have a long-term impact on the market. Therefore, the pair's upward trend may resume today.
It is noteworthy that the euro received additional support yesterday from the ZEW reports. The German business sentiment index surged to 84 points, which is the best result in the last 20 years. This result reflects the optimism of German entrepreneurs regarding the prospects for the recovery of the European economy, amid the vaccination of the population against coronavirus, the resilience of the economy in the first quarter and a decline in cases of COVID-19 in Germany.
It can be recalled that last week's German PMI index in the manufacturing sector also came out in the green zone, being at around 66.4 points. The indicator has been steadily rising since the beginning of the year, and it updated its annual high (66.6 points) in March. The following month, the indicator came out at almost the same level, reflecting the recovery processes. In the service sector, the German PMI slightly fell, but still remained above the key 50-point mark.
The Euro currency is also supported by the European Central Bank, whose representatives admit the tightening of monetary policy parameters. In particular, ECB Vice President, Luis de Guindos, announced earlier the possible winding down of QE. According to him, the Central Bank will begin to think about the rollback of monetary stimulus when the ambitious plan of Brussels to vaccinate 70% of the adult population is implemented. Given the increasing pace of vaccination, this issue may be on the agenda before the end of this year. To date, more than 30% of the adult population in Europe have received at least the first dose of the COVID vaccine.
In turn, the US dollar is under the background pressure from the Fed's "dovish" position. During his last speech, Jerome Powell ruled out once again the option of early winding down of QE as well as raising the interest rate, even if the key macroeconomic indicators indicate the "overheating" of the economy. However, the last Nonfarm data, which were published last Friday, testified to the opposite, that is, a slowdown in the growth of the labor market. If today's release of US inflation growth data also disappoints the market, EUR/USD buyers will be able to test the resistance level of 1.2170 again.
Technically, one can consider short-term purchases with a target of 1.2170 (upper line of the Bollinger Bands indicator on the daily chart) from the current positions. If we talk about medium-term prospects, then longs to the levels of 1.2200 and 1.2242 (this year's high) can also be considered.
