The upward correction of the dollar ended as soon as it started. On the last day of November, the greenback showed unexpected activity, rising in price across the market. In particular, the euro-dollar pair retreated from the 20th figure, although during the European session on Monday, traders updated the three-month high, reaching the level of 1.2003. The other dollar pairs showed similar dynamics, allowing the dollar to show character.
However, the moment of glory did not last long: already during the Asian session on Tuesday, the dollar index turned around and continued its downward path. Actually, there were no good reasons for changing the trend – just on the last day of November, many traders fixed profits, thereby affecting the configuration of the main dollar pairs. The formal reason for the growth of the greenback was the official nomination of former Fed chair Janet Yellen for the post of US Treasury Secretary. But this fundamental factor did not work for long: first, the news about Yellen's appointment was played out by the market last week, and secondly, the very fact of this appointment (which will be implemented only at the end of January next year) does not solve the urgent problems of the US dollar.
The market also reacted to the news that the Federal Reserve extended four emergency lending programs. The deadline for providing liquidity to commercial bills, primary dealers, and income protection programs was extended.
But in general, the fundamental picture for the euro-dollar pair has not changed since Monday. The dollar index continues to gradually slide down, buyers of the EUR/USD pair continue to besiege the 20th figure. Purchases of the pair are still a priority, although there is no need to hurry with trading decisions until Tuesday's trading ends. Note that the most important macroeconomic reports in Europe and the US will be published on Tuesday, which may affect the mood of investors.
Thus, during the European session, data on the German labor market will be published. The outlook is negative with an expectation of a rise in unemployment to 6.3%, and an increase in the growth rate of the number of unemployed by 9,000 (in October, there was a decline of 35,000). The publication of key data on inflation growth in the eurozone is also expected on Tuesday. According to preliminary forecasts, the main indicators will remain at almost the same values as in October. The general consumer price index should come out at the level of -0.2% (in the month before last it was at the level of -0.3%), while the core index in November is likely to remain at the level of 0.2%.
The behavior of the euro will depend on how close the real numbers are to the forecast values. If the overall CPI indicator leaves the negative area for the first time in the last three months, the EUR/USD pair may not only enter the area of the 20th figure but also attempt to gain a foothold in this price area – especially if core inflation also turns out to be in the green zone. German data will play a supporting role – they will either increase the impact of the pan-European figures (if they also come out better than expected), or they will be ignored by the market.
But during the US session, all attention will be focused on the ISM index in the manufacturing sector. After a sharp increase in October to almost 60 points, a serious decline is expected in November of up to 56 points. If the indicator falls lower, the downward dynamics of the dollar index will increase, while buyers of EUR/USD will get another reason to conquer the 20th figure.
In other words, the most favorable scenario for EUR/USD bulls is expressed in the multipolarity of fundamental factors: European releases are released in the green zone, and American releases are released in the red zone, respectively. In this scenario, the euro can expect to storm the 20th price level and then consolidate.
All other options can be interpreted differently by the market, so if we consider short-term trading, it is better to wait until the evening for trading decisions. If we talk about the medium and long-term prospects of EUR/USD, then, in my opinion, the priority, in any case, remains for long positions. Against the background of a general increase in risk appetite, the dollar cannot find a foothold for the development of a large-scale counterattack across the entire spectrum of the market.
In addition, the inability of politicians to find a compromise on the issue of agreeing on a new package of assistance to the US economy increases the risk that the Federal Reserve may soften the parameters of monetary policy in one form or another on its December meeting. Most likely, it will announce additional bond purchases.
Such a fundamental background does not contribute to the recovery of the greenback – including in the pair with the euro. While the ECB does not expect European inflation to accelerate until the end of this year – that is, if the release comes out at the level of forecasts, the market will show a phlegmatic or short-term negative reaction. But if inflation surprises with its growth, the reaction of traders will be quite large-scale.
Thus, if we talk about medium-and long-term prospects, longs can be opened from current positions with the first target of 1.2010 - high of the current year. But, in my opinion, it is more profitable to buy this pair during recessions (for example, if European inflation remains in the negative area), with the main target of 1.2000.
