The euro-dollar pair ended the trading week on a minor note. Last Thursday, traders were getting close to the borders of the 15th figure, while Friday's trading ended at 1.1350. In just two days, the pair collapsed by almost 150 points, reflecting the euro's vulnerability and the prospects of the US currency. There are several fundamental factors that contributed to the strengthening of bearish sentiment. First of all, this is the growth of US inflation, the escalation of the situation around Ukraine, the dovish comments of the head of the European Central Bank and the hawkish comments from the Federal Reserve. These factors simultaneously strengthened the greenback and weakened the euro, allowing EUR/USD bears to settle within the 13th figure.
It is noteworthy that traders of the pair initially demonstrated an abnormal reaction to the record increase in inflation in the United States. After a slight decline, the pair soared, overcoming a 100-point path in a few hours. And this despite the fact that immediately after the release, the yield of treasuries increased significantly, and the spread between two-year US and German government bonds expanded to almost 1.9%. But contrary to everything, and above all contrary to common sense, the EUR/USD pair grew almost until the end of the US session on Thursday. Discussing this event, some experts suggested that in this case we witnessed a "game of market makers", given the previous positioning of large speculators (based on CFTC data). I repeat – by the evening of the same day, everything fell into place: the price turned the downside, offsetting the bulls' ambitions.
But the downward dynamics of the pair, which was observed throughout yesterday, is explained not only by the growth of US inflation and the strengthening of hawkish expectations about the Fed's further actions. There are several other fundamental factors that have increased the pressure on EUR/USD.
As they say, "trouble came from where they did not expect." The euro was tripped up by ECB President Christine Lagarde, who voiced rather mild comments. Thanks to her, the EUR/USD bulls organized a counteroffensive in early February, rising by several hundred points. In fairness, it must be said that traders themselves are to blame for having formed a general idea of the hawkishness of the ECB. This is a very fragile construct, which was, in fact, based only on the fact that Lagarde did not deny the interest rate hike within the current year. This "taciturnity" of Lagarde (who had previously, as a rule, rejected the possibility of a rate hike) allowed some experts to assume that hawkish sentiments began to dominate in the ECB's camp. Against the background of these assumptions, currency strategists began to "assign" the dates of a possible increase (September and December are most often heard). In other words, the head of the ECB, by her taciturnity, launched an avalanche-like process that helped the EUR/USD bulls approach the borders of the 15th figure.
However, Lagarde still "talked": she said that an increase in the main interest rate "in the current conditions will not reduce record high inflation in the eurozone and will only harm the European economy." Such an unexpected remark fulfilled the role of a "cold shower": the head of the ECB clearly outlined her position, confirming her commitment to the accommodative policy. In this context, it will be very interesting to study the minutes of the ECB's last meeting (as you know, it is published two weeks after the meeting itself). Let me remind you that according to the minutes of the December meeting, five members of the Council lobbied for the hawkish scenario. If, following the results of the February meeting, this number increases slightly, the euro will be under the strongest pressure. However, Lagarde's rhetoric already suggests that it will not be easy for EUR/USD bulls to prove their worth.
By the way, against the background of the dovish comments of the head of the ECB, a Fed representative recently made hawkish statements. We are talking about the head of the St. Louis Federal Reserve, James Bullard, who this year has the right to vote in the Committee. He became the first Fed official to comment on the latest data on the growth of inflation in the United States. According to him, in light of the latest releases, he decided to take "the most hawkish position." Bullard said that in his opinion, the central bank should raise the interest rate by one percentage point during the next three meetings. Earlier, his colleague, Rafael Bostic, admitted the possibility that at the March meeting the rate would be raised by 50 basis points at once. I believe that in the future, the rhetoric of the Fed representatives will only get tougher.
Geopolitics also provided support for the US currency. On Friday, leading American media and news agencies (The New York Times, Bloomberg), citing anonymous sources, announced that Russia would invade Ukraine next week. The journalists even named specific dates, however, with a difference of one day (February 15, 16). Such officially unconfirmed reports began to appear against the background of the fact that more than ten countries of the world (including the United States) called on their citizens to leave Ukraine. At the same time, Russian officials denied the existence of such aggressive intentions. The Russian Foreign Ministry said that the Western media "spread outright misinformation, engaged in manipulation." It is noteworthy that the White House, represented by security adviser Jake Sullivan, today denied the panic rumors and stated that Washington does not have information about Moscow's intentions. He also said that the presidents of the Russian Federation and the United States will hold telephone talks on Saturday.
Nevertheless, the foreign exchange market is more likely to focus on newspaper headlines (especially such influential publications) than on subsequent refutations. Therefore, the dollar received additional support as a protective tool.
The combination of fundamental factors suggests that the EUR/USD pair has not exhausted its decline potential. Next week, many representatives of the Fed will comment on the growth of inflation in the United States, and with a high degree of probability, these comments will be in favor of the greenback. In addition, the minutes of the Fed's last meeting will be published next Wednesday, which may also strengthen hawkish expectations.
Summarizing all of the above, it can be concluded that it is still advisable to use any upward spikes in the EUR/USD pair to open short positions. The nearest target of the downward movement is the 1.1300 mark (the Tenkan-sen line on the weekly chart, the lower limit of the Kumo cloud on the daily chart).