The euro started a new week quite positively. Traders showed interest in buying the currency, but everything will depend on further developments and, of course, the dollar. The greenback is demonstrating a quite weak trading activity. However, the dollar reacted to Jerome Powell's comments confirming tapering timings for the asset purchasing program. USD closed the trading session in the red zone as there was not much to gain back. The Fed is still not serious enough about accelerating inflation and has no plans to raise rates in the coming months.The recent news about Evergrande increased investor's risk appetite. The head of the company announced that work on more than 10 projects in Shenzhen, Dongguan and other cities had begun again. However, reasons for concern still remain. Evergrande's default is delayed, but the next grace period ends on October 29, meaning that market players may start to worry again in the coming days.What does the euro need to keep its uptrend? If the demand for risk persists in the next two sessions, the buyers will try to push the EUR/USD pair to 1.1725, with the yields of the 10-year treasuries falling. The 1,1620 level raises some worries, if it is broken through, the bearish pressure may be difficult to withstand.The target level for the buyers is 1.1725, while the target level for the sellers is 1.1575.
Treasury yields, meanwhile, rose by more than 1% after Friday's sharp drop. This gives confidence to the dollar and allows it to take advantage of the weaker euro. In the absence of significant fundamental factors like today, the dollar's positioning in the market remains the main driving force for the EUR/USD pair.
On Monday, the Chicago Fed will publish the National Activity Index and the business activity index for manufacturing will be released by the Dallas Fed. At the same time, Germany has already released the results of the IFO survey. Deterioration of business sentiment in the EU largest economy is naturally not a positive factor for the euro, which was trading in a narrow range for quite a long time.
Buyers find it hard to break out of the range. In addition, it is very difficult to decide on the short-term trend before an important economic data release. It is unlikely that bulls will dare to push before the ECB meeting, which will take place later this week. The EUR/USD pair is likely to trade between the key technical levels in the coming sessions.
As for the outcomes of the meeting, the bulls have nothing to count on. Markets are 100% confident in Christine Lagarde's dovish rhetoric. The European monetary policy will maintain an expansive tone for a long time, reminded ECB Governing Council member and Spanish central bank governor Pablo Hernandez de Cos. The central bank will continue to experience high inflation rates in the coming months, expecting a natural stabilization of the situation sooner or later.
The US GDP report release is among the important events for EUR/USD traders this week. The economic recovery could be linked to the two upcoming events this week.
The euro pulled back from higher levels today, but the leading indicator is still encouraging for buyers.
The USD index did not manage to overcome and consolidate above the previous highs, though it has potential to do so. Judging by the latest fundamental picture, the US GDP report should be impressive. There was strong retail sales data, the purchasing managers composite index spiked to a 3-month peak, jobless claims fell to a new post-pandemic low. There was zero reaction from the dollar.
The Fed will be cutting stimulus, and this is not a speculation, but almost a fait accompli. Maybe the problem is that the US cannot afford raising the rate, while other countries, such as the Central Bank of England, can do it more easily.
Meanwhile, the US, as well as the rest of the world, will experience high inflation rates, no matter what Powell or Yellen say. If the US misses the moment with the growth of the consumer price index, then it may face stagflation.
Notably, the UK now looks more advantageous than the US, so the yields of the UK government bonds are growing faster than their US counterparts. The dollar does not have enough strength, and it has to give way and somewhere pass ahead of the pound and the euro.