The dollar index continues to lose ground as it falls following the yield of 10-year Treasuries, which in turn dropped below 1.130% - that is, to the lows of 2016. The coronavirus factor, which until recently significantly strengthened the US currency, now turned against it a heavy anchor. Traders are afraid of investing in the dollar, as rumors about the Federal Reserve's possible reaction to the current situation intensified in the market. In addition, the Japanese currency returned to operation this week, after unexpectedly optimistic statements by the head of the Bank of Japan. After the risk of interest rate cuts by the Japanese central bank weakened, the yen began to gain momentum, being in demand as a defensive tool. But traders have revised their attitude to the US currency: and although the dollar index is still kept at high values, the downward trend has become quite persistent.
The euro-dollar pair also uses the greenback's temporary "disgrace". After reaching many-year lows, the price got stuck in a flat last week: the bears were afraid to catch the price low, in turn, the bulls had no arguments for growth. The situation was in limbo for several days. It became clear at the beginning of the week that sellers are not able to develop the downward trend. For many reasons, both because of the oversoldness of the pair (the price nearly plunged without retreating for three weeks), and because of the continued vulnerability of the dollar, amid the dovish comments of some Fed representatives. In other words, it was only a matter of time for the corrective growth of the EUR/USD pair.
I did not have to wait long: the buyers of the pair took the initiative today, gradually approaching the boundaries of the 9th figure. The price growth was provoked only by a weakening dollar - the European currency is still under pressure from fundamental problems, including those related to the spread of coronavirus.
Why is the dollar so drastically weakened? A catalyst for the overall decline in greenback was an indicator of consumer confidence in the Americans. Contrary to growth forecasts, it remained almost at the level of January, adding only four tenths of a percent. But this release served only as a formal occasion, while the real reasons are more widespread. So, on the market they are increasingly saying that the Federal Reserve may lower the interest rate at one of the next meetings (either in April or in June). Some of the analysts even allow a double decline - in summer and autumn. In their opinion, such a scenario cannot be ruled out - everything will depend on the scale of the economic crisis, which could be triggered by the coronavirus factor.
Representatives of the Fed do not confirm, but do not refute such intentions. For example, Jerome Powell made it clear at the end of his speech in Congress that the Fed is ready to maintain a wait-and-see attitude unless events of an "unforeseen nature" lead to a significant reassessment of current prospects. This conclusion was also mentioned in the Fed's semi-annual report. Obviously, the negative consequences of the epidemic can be attributed to events of "unforeseen nature."
The rest of the Fed voiced diametrically opposed opinions. So, the president of the Federal Reserve Bank of Atlanta, Rafael Bostic, believes that the coronavirus epidemic will have a short-term effect on economic activity, and therefore there is no need to change monetary policy at the moment. His colleagues - Judy Shelton and Christopher Waller (Trump's allies) said they were ready to reduce the interest rate - down to zero. Neel Kashkari, who is a consistent dove, also called for an interest rate cut to offset the negative effects of coronavirus. The head of the Federal Reserve Bank of Cleveland, Loretta Mester, called the epidemic "a significant risk factor," but at the same time called for a wait-and-see attitude.
In other words, the Fed's interest rate cut is back on the agenda. The very fact of such a discussion is already putting pressure on the dollar. Pressure will increase if there are more supporters of the dovish scenario.
By the way, the representative of the European Central Bank - the head of the Bank of France Francois Villeroy - unexpectedly voiced optimistic rhetoric today. According to him, an outbreak of coronavirus will negatively affect the dynamics of key indicators, but at the moment, "you should not respond to the circumstances with the help of monetary policy." And although Villeroy has only voiced his opinion, this news feed provided background support for the euro, especially after yesterday's IFO reports that came out in the green zone.
Thus, buyers of the EUR/USD pair took advantage of the fundamental picture that has developed against the US currency today. Although the correction for the pair was brewing for a long time, the bulls needed a good reason for the upward momentum. Today, as they say, "the stars came together" - against the backdrop of a rapid decline in the dollar index, the ECB representative voiced very encouraging theses.
But here it must be emphasized that we are only talking about a temporary correction. According to many experts, Italy will not be able to restrain the spread of the epidemic, especially given the openness of borders between EU countries. For example, they announced the first people who became infected in Austria and Croatia - according to local authorities, all those who were ill recently visited Italy. Therefore, the coronavirus is just beginning its "tour" in Europe, and the euro will still feel the consequences of this "trip". Therefore, when the pair approaches the resistance level of 1.0920, traders should be careful - EUR/USD bears can become active here, especially when panic in Europe intensifies.
