Over the weekend, US President Donald Trump signed a bill to allocate two trillion dollars to help the economy. After a short political battle, this document was supported by both the House of Representatives and the Senate. The head of the White House approved the law almost immediately after its adoption, reminding reporters that these funds will be used for additional funding for the health care system, business support and direct payments to Americans.
By and large, the market did not doubt that in the end US politicians would find a common denominator in this issue and agree on the proposed law. The Democrats did not resist for long, as a prolonged blocking of the bill could turn electoral losses against them. Despite the predictability of this scenario, dollar bulls positively assessed its implementation – the greenback in one way or another strengthened in almost all pairs at the beginning of the trading week.
Let me remind you that the previous week was extremely unsuccessful for the dollar - the US currency was rapidly falling in price on all fronts, at the fastest pace in the last ten years. Therefore, the corrective pullback in the wake of a half-empty economic calendar and positive news from the White House looks quite logical. But here the key question is different: are we now dealing with a corrective price pullback or was last week's dynamics a moment of weakness for the greenback? Despite a slight increase in the dollar index (this indicator rose from 98.53 points to the current value of 99.30), dollar pairs react differently to its comeback. For example, the GBP/USD pair actually ignores the US strength, as does the AUD/USD pair. The loonie feels insecure (especially after the Bank of Canada's Friday decision), but the yen, coupled with the dollar, even tried to show character today.
Against the backdrop of the above dollar pairs, the European currency looks the most affected. In the first half of today, the EUR/USD bears were able to push the pair under the support level of 1.1060 (the middle line of the Bollinger Bands indicator, which coincides with the Kijun-sen line). Now, sellers are actively trying to take the pair to the area of the ninth figure in order to strengthen their positions and return the general bearish mood to the market. And here it is worth noting that in the case of the EUR/USD pair, it is not so much about strengthening the dollar, but about weakening the single currency. As you know, Brussels could not conduct a blitzkrieg and implement the Marshall Plan to save the eurozone economy. By the way, last week the euro strengthened its position precisely due to optimism regarding the implementation of this scenario - the intentions of the head of the European Council Charles Michel sounded too ambitious.
However, last Thursday, European Union leaders at an online summit failed to agree on the scale and tools to support the economy. The parties went to the corners of the ring, giving eurozone finance ministers two weeks to develop possible options. Initially, this fact could not change the optimistic mood of the European currency, but later in the press began to show facts indicating a serious split between the"South and North" of Europe. And this fact has already broken the EUR/USD bulls, especially against the backdrop of coordinated actions of congressmen in the US.
As it turned out, the key stumbling block was the so – called "crown bonds" - a common debt instrument for all EU countries that would help finance the response to the coronavirus pandemic. The leaders of Italy and Spain, which are the countries where the most widespread outbreaks of the virus occurred, called for the early introduction of such bonds. In turn, the main opponents of the idea were Germany, the Netherlands and Austria. The leaders of these countries said that at the moment no one knows when the crisis will end, so the EU needs to keep certain tools to intervene later if necessary. However, Italian Prime Minister Giuseppe Conte continued to press his case, emotionally expressing his point of view. As a result, the summit lasted three hours longer than planned, but the parties were unable to find a consensus.
The main opponent of the Italian leader - German Chancellor Angela Merkel - said that she prefers to use the European stabilization mechanism (ESM), which was created in 2012 for such purposes – to help the countries of the eurozone in serious financial crises. The arguments continued for six months!) hours, and, according to the European press, in some situations, the leaders of the countries did not restrain their emotions. As a result, the head of the European Council invited all participants of the meeting to return to the debate in two weeks, when all the proposals of the eurozone finance ministers will be considered.
In other words, Europe has demonstrated an inability to act quickly, decisively and, most importantly, in a coherent manner. Italians took the current situation quite painfully (especially amid rising deaths from Covid-19 and a complete standstill of business in the country) - according to Conte, it is not just about the current differences between him and the German chancellor, but about a "hard and frank confrontation" regarding the future course of the EU.
It is worth noting that political troubles in peacetime also exerted significant pressure on the euro – what can we say about today? Therefore, it is not surprising that the European currency reacted negatively to recent events – after all, the parties did not come to a common opinion, and after the summit, the rhetoric of politicians (both north and south) only tightened.
This fundamental background contributes to a deep pullback of EUR/USD. But, in my opinion, until the bears have overcome the support level of 1.0880 (the lower boundary of the Kumo cloud on the daily chart), it is too early to talk about the resumption of the downward rally. Let me remind you that not only Nonfarms data will be released this week, but also other important US macroeconomic reports (ISM indices in the manufacturing and non-manufacturing sectors, the ADP report, the consumer confidence indicator). According to preliminary forecasts, all these indicators will be disappointing, showing anti-records. Last week, devastating data on the labor market were released (an increase in the number of applications for unemployment benefits by three million). A devastating indicator in the field of production was published today – the production activity of the Federal Reserve Bank of Dallas fell to a record low (-70 points). If the key indicators come out even weaker than the weak forecasts, the dollar may again be under pressure.
Thus, in order to open short positions with an approximate target of 1.0880, traders need to ensure the strength of the downward movement. To do this, the bears need to overcome the upper limit of the Kumo cloud on the daily chart, that is, break through the 1.1005 mark, consolidating below. In this case, sellers will open a path to the lower boundary of the specified cloud – to the price target of 1.0880. Since at the moment the downward momentum has stalled, sales look risky – selling can only be considered in the area of 1.0990–1.0980.
