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26.01.2021 11:39 PM
EUR/USD. IMF report, Italian showdown and the whims of the foreign exchange market

The US dollar once again confirmed its reputation of an unreliable ally: over the past three weeks, the US currency has shown undulating price movements. The dollar index starts from the bottom of the 90th figure and has been gradually (but almost continuously) growing for several days, reflecting investors' interest in the greenback. But as soon as the index reaches the range of 90.50-90.70, the dollar falls under a wave of sales, plunging down. Of course, this price dynamics is not only due to technical factors – first of all, traders react to the rapidly changing fundamental background. The market rushes from extreme to extreme: interest in a safe dollar is growing, then sharply decreasing. The US currency, accordingly, obeys the whims of traders.

For example, Tuesday morning, the greenback was steadily gaining momentum throughout the market amid rising anti-risk sentiment. Market participants were alarmed by new research data on the South African strain of coronavirus, which has already been recorded in many countries around the world. According to scientists, this strain is more resistant to antibodies and poses a risk of re-infection. The second conclusion of virologists is even worse than the first: in their opinion, the developed vaccines may be ineffective against the South African strain. And although the above assumptions were made in a hypothetical way (since the research is still ongoing), the reaction of traders was not long in coming. The safe-haven dollar has once again become the market's favorite, while risky assets have been hit by a wave of sell-offs.

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Looking ahead, take note that such fundamental factors (of an emotional nature) have a short shelf life. For example, in early January, the dollar was the beneficiary of the political crisis in the United States, when Trump supporters stormed the Capitol. The unprecedented nature of the situation itself frightened investors, afterwards the demand for a safe greenback significantly increased. But just a few days later, this momentum began to gradually fade. The fears of American security forces and law enforcement officers about possible sabotage by the far-right did not materialize, although the FBI reports indicated such risks. The inauguration was held in normal mode, after which political life in the United States returned to its usual course. The dollar, in turn, was again left out of business.

This week, the US currency fell into a similar trap. The panic mood associated with the South African strain of coronavirus allowed dollar bulls to show character – but the impulsive growth of the dollar index faded as soon as it began. The unexpectedly positive report from the IMF has brought back interest in risky assets.

The International Monetary Fund today revised its forecast for global economic growth this year. If earlier the Fund expected to see growth of 5.2% this year, now this figure is 5.5%. As you can see ,the growth was only 0.3% compared to the October forecast. But against the background of widespread repeated knockdowns, mutated strains of coronavirus and other negative echoes of last year, the very fact of improving the forecast (albeit in minimal execution) increased the overall risk appetite in the market. Explaining its decision to revise the forecast, the IMF noted that in the second half of last year, the world economy "revived more than expected." And although the Fund's report is dominated by worrying notes (in this context, the next coronavirus waves and new strains of the virus are mentioned), the market focused on the overall headline of a positive nature.

If we directly talk about the EUR/USD pair, buyers could not fully take advantage of the general decline of the dollar. First, the political crisis in Italy remains on the agenda, which has only worsened today. Prime Minister Giuseppe Conte has resigned, which has already been confirmed by President Sergio Mattarella. It is noteworthy that Conte managed to avoid declaring a vote of no confidence in his government in parliament – he was supported in both houses of the legislature. But at the same time, the head of government lost an absolute majority in the Senate after his former ally, former Prime Minister Matteo Renzi, left the coalition. Now the situation is hanging in the air, and the pendulum can swing both in one direction and in the other. Either Giuseppe Conte will create a new coalition, or the country will hold early parliamentary elections. It is known that the center-left Democratic Party and the 5-Star movement have already announced their support for Conte. However, in order to organize a stable parliamentary majority, the prime minister needs to attract additional political allies to the alliance.

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This factor does not make it possible for buyers of EUR/USD to return to the area of the 22nd figure. Traders retreated from local lows, but the growth momentum did not continue. By the way, ironically, the IMF report weighed on both the dollar the euro. The fact is that the IMF has lowered its forecasts for the eurozone countries in 2021 by one percent at once – to 4.2% from the previous value of 5.2%.

Thus, the Italian political showdown, as well as the controversial (for the euro) IMF report, cooled the ardor of buyers of EUR/USD. Nevertheless, in my opinion, the pair remains within the framework of an upward movement - primarily due to the vulnerability of the US currency. To confirm the growth trend, the pair's bulls need to settle above the 1.2200 mark (the middle line of the Bollinger Bands indicator, which coincides with the Kijun-sen line on the daily chart). In this case, we can consider long positions with the main target at 1.2330 - this is the upper line of the Bollinger Bands on the same timeframe.

Irina Manzenko,
Analytical expert of InstaForex
© 2007-2024
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