Why is EURUSD falling? The good news about the absence of recession in the Eurozone against the background of warm weather and the collapse of gas prices has already been taken into account in the euro exchange rate. As for the U.S. economy, it gave a number of pleasant surprises in February, which returned investors' interest in the dollar. The futures market continues to raise the implied ceiling on the federal funds rate. Where exactly it will be, at 5.5% or 6%, no one knows. At the same time, derivatives are not changing their expectations for the ECB deposit rate. They see it rising by 50 bps in March.
Forex exchange rates are driven by investment and trading capital flows. And if the yield of Treasury bonds in response to the expectations of additional monetary restrictions from the Fed reaches its highest level since the beginning of the year, then the growth in the attractiveness of U.S. assets naturally strengthens the U.S. dollar against major world currencies.
In the eurozone economy, huge uncertainty remains. Yes, thanks to good weather, a recession was avoided, but the weather is changeable. Tomorrow will be colder, and then what? Yes, the currency bloc is standing firm for now, but what will happen when the consequences of the ECB's aggressive monetary tightening start to be felt? Central banks may become one of the weak links. They have accumulated a huge amount of debt on the balance sheet at low rates and are forced to finance them at high rates. The system is deprived of unexpected profits, which will result in an expansion of the budget deficit and, quite likely, higher taxes.
Dynamics of the ECB balance sheet and deposit rates
Still, the medium-term outlook for the euro continues to be bullish. Thanks to China and the unexpected strength of the U.S. economy, which could accelerate global GDP and increase the demand for risk. The latter, by the way, is not going to seriously deteriorate. Unlike bonds, which understood very well what the Fed would do, stocks continue to distrust the central bank. If not for their stability, EURUSD quotes would be significantly lower.
However, JP Morgan believes that the strong position of the S&P 500 is a temporary phenomenon. Historically, the stock index has not bottomed out before the federal funds rate has peaked. And it did not grow until the Fed moved from tightening to easing monetary policy. The fall of the stock market will become an additional trump card for the "bears" in EURUSD. It seems they are now in control of the situation in the pair, and its growth at the end of the week by February 17 is nothing more than profit taking on shorts by speculators.
Technically, the bulls' unsuccessful attempt to win back the pin bar on the daily chart of EURUSD speaks about their weakness. A repeated assault may be successful, so longs from 1.0705 are still relevant, but if it does not happen, the pair risks to return to 1.06 and go even lower. Thus, while the quotes are below the high of the pin bar, we should stick to the selling strategy.