The daily chart of EUR/USD reflects the indecision of both buyers and sellers of the pair. Formally, the last five-day trading period ended in favor of the bulls: if on Monday trading opened at 1.1590, today traders were besieging the equator of the 16th figure. Let's put it bluntly: this is a very dubious achievement, given the general weakening of the US currency.
The greenback has been under background pressure throughout the week for a number of fundamental reasons. This is the growth of risk sentiment (due to the rally on Wall Street), and contradictory rhetoric from the Fed representatives, and rather contradictory macroeconomic reports. All these circumstances did not sink the dollar, but at the same time did not allow it to organize an offensive movement throughout the market. Although the latest inflation release, as well as the minutes of the September meeting of the Federal Reserve, were on the side of the greenback. However, during the week, officials of the Board of Governors voiced diametrically opposed positions on when exactly to start raising the interest rate. In particular, James Bullard once again urged his colleagues to tighten monetary policy next year. Thomas Barkin voiced a more cautious approach, saying that a possible rate hike "depends on inflation and the state of the labor market," and Loretta Mester even announced that "in the near future" the Federal Reserve will not raise interest rates. At the same time, all representatives of the Fed agree that the stimulus program should begin tapering in November.
The final point in this regard was given by Jerome Powell, who spoke at an economic conference during the American session on Friday. He confirmed that the US Central Bank is "on the right track," having decided to start reducing asset purchases next month. Powell also reiterated the thesis that the increase in inflation is temporary – "most likely" inflation indicators will decrease next year. But at the same time, there were also "hawkish" notes in his speech. According to him, the "most likely scenario" is a weakening of inflationary pressure in 2022. "However, if we see that the risk of inflation will constantly increase, we will definitely use our tools," Powell added. Reacting to these words, the EUR/USD pair retreated to a local intraday high of 1.1656 and headed to the base of the 16th figure.
Recall that the head of the Fed has already voiced a similar position in late September in the US Congress. During his speech, he said that the US regulator "may have to consider raising rates if the Committee sees evidence that rising prices are forcing households and companies to expect higher prices to take root, creating more stable inflation." This phrase then provoked increased volatility in the market, since de facto Powell for the first time admitted the possibility that the Fed would have to stop the growth of inflation indicators by raising rates next year. On Friday, he again veiled hinted at the implementation of such a scenario. However, this time he emphasized its improbability.
And yet, the very discussion about the likelihood of tightening the Fed's monetary policy next year keeps the US currency "afloat." And even more so - paired with the euro, which is generally devoid of support from the European Central Bank. This week it became known that the most prominent representative of the "hawk wing" of the ECB – Jens Weidmann - decided to leave his post at the end of this year. At the same time, other representatives of the European regulator continue to voice a "dovish position," calling for further implementation of an accommodative policy, ignoring the growth of inflation in the eurozone. In particular, this week the head of the Central Bank of France voiced similar rhetoric.
Thus, the divergence of the rates of the Federal Reserve and the European Central Bank will act as a sword of Damocles for buyers of EUR/USD. Friday's price dynamics is an eloquent confirmation of this. Throughout the day, the bulls pulled the pair up, "squeezing" an intraday maximum of 1.1654 out of it. But as soon as Jerome Powell covertly admitted the hypothetical probability of a Fed rate hike next year, the buyers' house of cards collapsed in the blink of an eye. All this suggests that it is advisable to use any more or less impressive corrective growth of EUR/USD to open short positions.
There is another circumstance that speaks in favor of further growth of the US currency. We are talking about the growing anti-risk sentiment in the market, against the background of Joe Biden's statement on Friday. The head of the White House said that the United States will defend Taiwan in the event of an attack by China. According to experts, this is a clear departure from the foreign policy position of the United States, which the country has been taking for many years. At the time of this writing, Beijing has not reacted to Biden's words – but given the background of relations between the United States and China (including on the Taiwan issue), it can be assumed that the Chinese will not ignore such a sharp attack by the American leader. It is obvious that if tensions between the superpowers increase, the dollar will be in high demand - already as a protective asset.
Thus, despite the results of the past week that failed for dollar bulls, it is still impossible to write off the US currency. The single currency looks vulnerable, and the corrective growth of EUR/USD is shaky, especially against the background of a possible strengthening of anti-risk sentiment in the market. Therefore, it will be extremely difficult for buyers of the pair to approach the main resistance level of 1.1680 (the upper line of the Bollinger Bands indicator on the daily chart), and even more so to gain a foothold above this target in order to claim the 17th figure. Therefore, any corrective surge can still be used as an excuse to open short positions with the first target of 1.1600 (the middle line of the Bollinger Bands). The main target of the downside movement is located much lower, at 1.1530. This is the price minimum of the year, which coincides with the lower line of the Bollinger Bands on the same timeframe.