The euro-dollar pair settled within the 12th figure, demonstrating a corrective upward pullback. EUR/USD bulls pushed off from the multi-month price low (1,1121), which was reached last Friday, and partially returned the lost points. Today, traders came close to the resistance level of 1.1290 (the lower limit of the Kumo cloud on the daily chart), but did not dare to storm this target. In general, at the moment, the pair is still dominated by bullish sentiment against the background of the general weakening of the US currency. But the current picture looks unnatural and even anomalous, given the "unipolar" fundamental background of the pair.
It should be emphasized right away: the pair is getting more expensive mainly due to the weakening of the US dollar. The euro did not have its own forces to turn the situation around, and still does not. Take a look at the main crosses involving the single currency: pairs such as EUR/JPY, EUR/CHF and EUR/GBP behave modestly enough – the euro is either under pressure or trading flat. Therefore, the locomotive of the corrective growth of the EUR/USD pair is the dollar.
It is noteworthy that the dollar is getting cheaper without any specific and distinct reasons of a fundamental nature. There is no consensus on the market regarding the reasons for this behavior of the currency. According to some experts, investors got rid of the greenback at the end of the month, taking profits. In January, dollar bulls played back powerful fundamental impulses (record inflation growth in the US, the hawkish attitude of the Fed), after which they paused, thereby putting pressure on the currency.
According to other analysts, the dollar has become a victim of traders' increased interest in risky assets. After several weeks of "information pumping" regarding the possible invasion of the Russian Federation in Ukraine, there is now some detente. High-ranking representatives of Kiev and Moscow urged not to sow panic and refuted the "blitzkrieg" option. In addition, the day before yesterday it became known that the troops of the Western District returned to their bases. Risky assets accelerated growth on the direct statements of the Russian Foreign Ministry about the unacceptability of the war between Russia and Ukraine. One of the beneficiaries of the current situation was the euro, which was "at the forefront of the attack" (the prospects of the gas crisis, mutual economic sanctions with the Russian Federation, etc.). The decrease in geopolitical tensions affected the dynamics of EUR/USD, including due to the fact that the dollar ceased to be in high demand as a protective tool.
The corrective growth of the pair is explained by another reason. As you know, yesterday German inflation came out in the green zone: although the key indicators slowed down their growth, they still remained near the highs. The market assumed that the pan-European inflation on Wednesday will also pleasantly surprise traders, although according to preliminary forecasts, the CPI growth in annual terms will still slow down. If the inflation indicators do come out in the green zone, the bar of hawkish expectations regarding the outcome of the February European Central Bank meeting will rise even higher.
Let me remind you that, according to the minutes of the December meeting, there were "oppositionists" among the members of the ECB who do not support the current rate of the central bank. In their opinion, high inflation has become stable, and, consequently, the ECB needs to revise its policy towards tightening. At the last meeting, five of the 25 members of the Board of Governors took a hawkish position. According to the assumptions of a number of analysts, a further increase in inflation in the eurozone will strengthen the hawkish wing of the ECB. As a result, the ECB may allow an interest rate hike this year.
These are the assumptions. The EUR/USD pair is based on these assumptions within the 12th figure. Plus, there are rumors on the market that the Fed will not dare to implement the most hawkish scenario, which involves 6 or 7 rate hikes by the end of this year. The reason for such conversations was publications in the US press – as some economists believe, too aggressive pace of monetary policy tightening may eventually provoke a recession. At the same time, Federal Reserve Chairman Jerome Powell, following the results of the January meeting, voiced his position in two ways – on the one hand, he really did not rule out the possibility that the Fed would raise the interest rate at each meeting in 2022. But at the same time, he actually "tied" this issue to the indicators of inflation and the labor market. A little later, the president of the Federal Reserve Bank of Minneapolis, Neil Kashkari, said that the central bank would make decisions "based on incoming data." At the same time, he noted that the Fed may "take a break in the spring." This rhetoric has put pressure on the greenback.
Summarizing the above, we can conclude that the current growth of the EUR/USD pair is temporary. The market lives by expectations – both optimistic and pessimistic. Bulls hope that the growth of European inflation will tighten the ECB's position. Thus, traders overestimate the bar of expectations: if ECB President Christine Lagarde refutes the hawkish scenario in spite of inflationary growth (as it was in December), the euro will be under the strongest pressure. Not to mention the fact that pan-European inflation may itself disappoint investors with a "red color". But the US currency may well cheer up this week - if the January Nonfarm on Friday will come out better than expected.
Thus, in my opinion, the growth of the pair is based on shaky fundamental factors: too many "buts" and too many "ifs". Therefore, at the moment, you can either take a wait-and-see position, or consider the option of short positions. Bulls of EUR/USD today failed to test the resistance level of 1.1290 (the lower boundary of the Kumo cloud on the D1 timeframe), which indicates the unreliability of long positions. The first target of the downward movement is 1.1200, the main target is 1.1150 (the lower line of the Bollinger Bands indicator on the daily chart).