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18.10.202109:05 Forex Analysis & Reviews: EUR/USD. Three fundamental factors of the US dollar rally

The EUR/USD pair continues to move around the level of 1.1600, although bearish mood is clearly dominating – timid attempts of EUR/USD buyers to develop a correction are stopped. The US dollar index surged during today's Asian session, returning to the area of the 94th figure. Such price dynamics were driven, partly by China's disappointing data.

It should be noted that the key indicators of Chinese economic growth for September and the third quarter of this year were released today, where almost all of them entered the "red zone", not meeting the forecast values. The slowdown in the growth of China's economy allowed the dollar bulls to remind of themselves again due to the strengthening of anti-risk sentiments.

Exchange Rates 18.10.2021 analysis

Therefore, the volume of China's real GDP came out at the levels of 0.2% (q/q) and 4.9 (y/y) – a slowdown here has been recorded for the second quarter in a row. The volume of real GDP from the beginning of the year was at the level of 9.8%. A downward trend has also been observed for the second quarter in a row. The volume of investments in fixed assets in September declined to 7.3%. The indicator has been consistently falling for 7 consecutive months. A disappointing result was also shown by industrial production figures, which updated multi-year lows. The retail sales data in the Chinese labor market was the only one in the "green zone".

After the publication of this release, the US dollar strengthened its position throughout the market, taking advantage of increased demand as a defensive asset. The EUR/USD pair also returned to the area of 1.15 level after several unsuccessful attempts on the part of the buyers to break through the resistance level of 1.1630 (the average line of the Bollinger Bands indicator on the daily chart).

In general, the strengthening of the US currency was a matter of time, especially if we talk about the EUR/USD pair. The growth of US inflation, the hawkish nature of the minutes of the last Fed meeting, the growth of the oil market, and the renewed growth in the yield of treasuries – all these factors play in favor of the US dollar. Strong data on the volume of retail trade in the US only complemented the positive fundamental picture. In turn, the euro has no proper support neither from the ECB nor from macroeconomic reports. The growth of inflation in the eurozone is ignored by market participants, due to the corresponding position of the regulator. The updated strategy of the European Central Bank allows for a temporary excess of the inflation target, allowing the regulator to ignore such an inflationary surge while ECB representatives do not tire of repeating that the increase in inflation is temporary and is not a reason to revise the parameters of monetary policy.

Despite such a "unipolar" fundamental background for the EUR/USD pair, the bears cannot decide on a price breakthrough that will allow them to finally consolidate in the area of the 15th figure and open the way to the main support level of 1.1450 (the upper limit of the Kumo cloud on the weekly chart). Traders need an appropriate information impulse. In my opinion, this week's movement will swing either one way or the other, as the whole Fed representatives are expected to speak. In this case, the US dollar will either resume the rally or allow its opponents in the main pairs of the "major group" to strengthen the corrective counteroffensive.

On Tuesday, October 19, Mary Daly, Michelle Bowman, Raphael Bostic, and Christopher Waller will speak during the American session. Charles Evans and Randall Quarls will voice their position on Wednesday. On Thursday, we have Patrick Harker and James Bullard. Finally, on Friday, Mary Daly and Richard Clarida will give a speech. They will take part in various conferences, forums, or councils. It should be noted here that starting from October 25, that is, next Monday, the so-called "silence mode" will come. The representatives of the Committee will not be able to speak in public within 10 hours before the Fed meeting (in this case, November). Therefore, the remarks voiced this week will be of particular importance in the context of understanding the Fed's general mood.

Among the main macroeconomic reports of this week, we can highlight the release of data on the volume of construction permits issued (Tuesday, October 19), the growth rate of initial applications for unemployment benefits (Thursday, October 21), the Fed-Philadelphia manufacturing index (on the same day), PMI indices in key European countries (Friday, October 22) and business activity indices in the US manufacturing sector (on the same day).

However, the aforementioned macroeconomic reports will be secondary. The focus is on comments from Fed members, Treasury yields, and oil market dynamics. The dollar rally or the US dollar's retreat throughout the market) will be formed based on these three factors. At the start of the trading week, the situation is in favor of the US currency, which began to gain impulse again.

Exchange Rates 18.10.2021 analysis

From a technical point of view, the pair on the daily chart is still located between the middle and lower lines of the Bollinger Bands indicator under all the lines of the Ichimoku indicator, which shows a strong bearish signal "Line Parade". The main support level (the target for the decline) is the level of 1.1510 – this is the lower line of the Bollinger Bands indicator on the same timeframe.

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