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27.01.202123:52 Forex Analysis & Reviews: EUR/USD. What is the secret of the euro's resilience or is the Fed driving itself into a trap

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Exchange Rates 27.01.2021 analysis

The spread of COVID-19 vaccines in the EU is painfully slow.

Meanwhile, more and more dangerous and new strains of the virus are reaching the continent, forcing national governments to tighten quarantine measures.

At the height of the pandemic, a new political crisis erupted in Italy. Prime Minister Giuseppe Conte is now trying to form a new government.

Despite all this, the euro is still staying near multi-year highs against the US dollar, trading in a range between the key support near $1.2050 and strong resistance at $1.2200.

What allows the euro to stay afloat? Although the answer to this question seems paradoxical at first glance, it is the fact that the US economy is showing growth that saves the euro.

According to a preliminary estimate, the index of business activity in the US services sector reached a two-month high in January, rising to 57.5 points from December's 54.8 points. At the same time, the purchasing managers ' index in the country's manufacturing sector increased to a record 59.1 points against 57.1 points in the previous month.

On Thursday, market participants will get their first glimpse of the state of the US economy in the fourth quarter of 2020.

After a record growth rate of 33.4% in the third quarter, the index is expected to rise by 4% in the last three months of last year.

However, the real numbers may be worse, given that the fourth quarter was quite difficult for the United States.

However, investors seem to have already begun to prepare for the weak economic growth indicators in the United States, which will be released later this week.

On Wednesday, the main currency pair sank below 1.2100 after reaching 1.2175 a day earlier.

A report from the research company Gfk exerted pressure on the euro, according to which the leading index of consumer confidence in the German economy in February collapsed to -15.6 points from the revised level of January at -7.5 points. Analysts expected the indicator to decline to -7.9 points.

Exchange Rates 27.01.2021 analysis

In another blow to the single currency, ECB Governing Council member Klaas Knot said that the central bank has room to further reduce its deposit rate if there is a need to improve financing conditions and achieve the inflation target.

According to analysts, his comment was the most obvious hint to date from the ECB on the possibility of a rate cut to stop the euro rally - a step that until recently seemed extremely unlikely.

Despite today's retreat from the EUR/USD pair, the trend for the euro's growth may resume with a potential target at 1.2230 (the 61.8% Fibonacci retracement level from the fall from 1.2350 to 1.2050). The reason for such a move may be the results of the Federal Reserve's January meeting.

At the same time, in the long term, there is reason to expect a decline in the EUR/USD pair to at least 1.1700–1.1800.

The Fed runs the risk of being trapped in their own actions. If the central bank stops providing liquidity through quantitative easing, a sharp correction will occur in the US stock market. However, further monetary expansion is fraught with risks for the country's financial stability.

"At some point, it will become clear that the Fed's policy has gone wrong, but at what point? In this regard, there are a couple of options. On the one hand, excessive market support compared to the real economy that needs it may cause a bubble in the stock market to burst, destabilizing the situation and leading to deflation. The recent jump in the US stock market could be an omen of such a scenario. On the other hand, an outbreak of inflation in the middle of the year due to the release of accumulated savings may prompt the Fed to raise rates prematurely, this error will only exacerbate the inflated speculative market," said strategists at Saxo Bank.

"In general, the Fed's ship will not easily sail between the speculative bubble in the stock market (with or without additional support measures) and the reaction to inflation. The USD will have a large margin for rapid growth in the event of a failure of the Fed's policy, " they added.

Viktor Isakov,
Expert Specializat
Grup InstaForex © 2007-2021
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