The US dollar has been losing ground for the second consecutive week, that is, throughout April. The euro-dollar pair, in turn, is trying to return to the 20-figure area, taking advantage of the greenback's weakness. If we look at the weekly chart of EUR/USD, we will see that the pair's upward trend started in November 2020 and reached its peak in early January 2021, when buyers were able to mark an almost two-year high of 1.2349. But then the dollar took the reins.
The immediate reason for the greenback's growth was the actual adoption (since the approval of the "budget reconciliation" mechanism) of the long-awaited "American rescue plan" worth $1.9 trillion. In addition, there are rumors on the market that the Federal Reserve may prematurely curtail the stimulus program and begin to increase the interest rate almost next year. These rumors were supported by recent US macroeconomic reports that were in the green zone, exceeding the forecast values. First of all, this concerns the US labor market over the past three months, the Nonfarm has surprised traders with its strong results that reflect the overall recovery of the US economy. The Fed also added fuel to the fire of hawkish expectations, as it revised its economic forecasts for GDP growth in 2021 in the direction of improvement: from 4.22% to 6.5%. Moreover, according to a number of experts (in particular, Goldman Sachs analysts), this figure will grow not by 6.5 percent, but by 8%.
In other words, for several months (from mid-January to the end of March), the dollar consistently and persistently strengthened its position, despite the dovish comments of the Fed representatives, who with enviable regularity refuted rumors that the central bank may prematurely begin to tighten the parameters of monetary policy. The greenback has been steadily following the yield of treasuries, which has updated its two-year high this 2021.
However, in April, we see a mirror situation - despite strong macroeconomic reports, the dollar is declining on all fronts, however, as is the yield on US government bonds. In other words, if at the beginning of the year the market ignored the comments of the Fed members, betting on hawkish expectations, now the market ignores the key indicators of the economy, which are still showing growth. Unemployment in the US has returned to the 5% area (that is, it has almost reached pre-crisis levels), inflation is showing a gradual but steady growth (the core CPI index reached 1.6%), retail sales have updated an almost annual high. However, the greenback ignored all these releases: since March 31, the US dollar index has fallen from 93.32 points to the current value of 91.53. The US currency has been losing its positions almost without a pullback.
In my opinion, this situation is caused by several fundamental factors. First, the Fed members still convinced traders that the central bank will not tighten monetary policy, thereby reacting to the spasmodic growth of key indicators - primarily in the field of inflation. Fed Chairman Jerome Powell has repeatedly stated that inflationary growth may be temporary, so the Fed will ignore the fact that it could even exceed the target two percent level. Yesterday, Fed representative Christopher Waller repeated this thesis, reassuring traders that the central bank will not allow inflation to approach the three percent level. At the same time, Waller noted that the markets are "too far ahead" in their expectations regarding the curtailment of QE and rate hikes. After these comments, the dollar was under pressure again, returning all intraday gains.
In one form or another, the aforementioned idea is regularly voiced by members of the Fed. Having convinced the markets that the Fed will not back down from its plans, Powell repeats this at every opportunity. At the same time, he agrees that the US economy is recovering at a more active pace compared to the Fed's December forecasts.
Given this disposition, it could be assumed that the EUR/USD pair will continue to show growth, at least until the White House agrees with Congress on the terms of approval of the 2.6-trillion infrastructure plan. If not for one "but": the pair's bulls came close to the resistance level of 1.2000. This target is symbolic and psychologically important, which also coincides with the upper line of the Bollinger Bands indicator on the daily chart and the lower border of the Kumo cloud on the same timeframe. It will not be easy for EUR/USD bulls to surpass this level of resistance: as soon as the pair approaches this price area, traders take profits, simultaneously opening short positions. By the way, the mirror situation was observed when the 1.2000 mark served as a support: the EUR/USD bears did not overcome this price mark at the first attempt: the first attempts were made in January, while the bears finally conquered the 19th figure only in early March, on the wave of a strong downward momentum.
Bulls need a similar momentum in order to rise above 1.2000. In my opinion, traders will still attempt to storm the 20th figure next week, but I doubt that the EUR/USD bulls will be able to settle in this price area. First of all, next week, the White House will hold regular talks with representatives of the Republican Party regarding the infrastructure plan. According to some media, the Republicans will announce a counter-proposal that is clearly unacceptable for Biden (reducing the "price tag" of the bill by three times), and the negotiations will be completed. After that, the White House will focus on negotiations with the Democrats, offering as a compromise the option of raising the corporate tax rate not to 28%, but to 24-25%. Any positive developments on this issue will provide significant support to the dollar.
In addition, the April meeting of the European Central Bank will take place next week. The euro is unlikely to be in high demand ahead of the event, given the weak dynamics of European inflation and the difficult epidemiological situation in Europe.
Thus, in my opinion, with the next upward bursts of EUR/USD, one can consider short positions with the first target at 1.1900 - this is the Tenkan-sen line on the daily chart.