The foreign exchange market started operating in normal mode on Tuesday after the prolonged three-day weekend in the United States in observance of Martin Luther King Jr. Day. Essentially, the workweek began on Tuesday, and it started with a general strengthening of the greenback.
The U.S. dollar index surged upwards, reaching a nearly four-week high, reflecting increased demand for the American currency. Traders reacted this way to the rise in geopolitical tensions in the Middle East. Additionally, Trump's victory in Iowa and the upcoming releases in China played a part. We will discuss the prospects of the situation's development below, but for now, it's worth cautioning market participants against hasty conclusions. The strengthening of the dollar, and consequently, the decrease in EUR/USD, is a 'castle built on sand.' Therefore, selling the pair looks risky despite its confident downward movement.
Today, emotions, which are inherently unreliable, are in control. Recent events in the Middle East have stirred the market, but such situations are usually short-lived. They flare up brightly and then quickly fade away. Moreover, judging by everything, yesterday's incident will not provoke a 'big war' that could theoretically lead to World War III. Despite the loud headlines in the press, the key players have kept their distance from each other, thus excluding the scenario of a retaliatory reaction.
As is known, last night, Iran launched missile strikes in Iraq and Syria. According to Iranian state media, the Islamic Revolutionary Guard Corps targeted 'spy centers and gathering places of anti-Iranian terrorist groups' in Iraq and Syria. It is claimed that a strike was made with ballistic missiles on the 'headquarters of spies from the Mossad intelligence service' in the autonomous region of Iraqi Kurdistan. Also, several explosions were reported near the U.S. consulate, 40 kilometers northeast of the city of Erbil. According to some media, there was also a strike at the American consulate, but not an operational one, rather one under construction.
However, here, rumors and even facts are not important – in this case, the official position of the parties is crucial. Tehran and Washington have already voiced their positions, so we can make certain conclusions regarding the prospects of the situation. Thus, the Iranian authorities, through state media, stated that the target of the attack was not American facilities, but anti-Iranian terrorist groups (which are claimed to be connected with Israel). The U.S. administration, although condemning the strikes, stated that American citizens and facilities were not harmed during the missile attacks on the Iraqi city of Erbil.
As they say, 'let's disperse.' There will not be a World War III – at least, yesterday's incident was not used by any of the key actors as a casus belli. It can be acknowledged that all players are walking on very thin ice, but at the moment, the situation seems to be resolved.
That is precisely why selling EUR/USD should be approached with great skepticism, especially in the context of medium-term and/or long-term trading.
At the same time, it must be acknowledged that the current fundamental backdrop does not favor an increase in the pair either. Markets remain tense in anticipation of important fundamental events. For example, during the Asian session on Wednesday, key data on China's economic growth will be published. According to preliminary forecasts, China's GDP in the fourth quarter of 2023 is expected to increase by 5.2%, following a 4.9% growth in the third quarter. Additionally, we will learn about the volume of fixed asset investment (December's figure) and the volume of industrial production (also for December).
If, contrary to forecasts, the indicators turn out to be in the 'red zone,' the dollar, as a safe-haven asset, will again enjoy increased demand. Here, it is worth recalling the market's reaction to the publication of Chinese PMI at the beginning of January, where the greenback benefited from the unsuccessful release. Also, this evening, a speech is expected from Christopher Waller, a member of the Federal Reserve Board of Governors, who will undoubtedly comment on the latest inflation reports published in the USA last week.
In addition, the presidential campaign is gaining momentum in the United States. Yesterday, Donald Trump confidently won the first presidential caucuses (party supporter meetings) held in the state of Iowa. According to experts, this unequivocal victory gives the former president a strong start in the fight for nomination as the official candidate for president in the elections to be held on November 5. Trump has reinforced his status as the primary leader after garnering over 50% of support of the Republican voters in the state.
Thus, the current decline in the EUR/USD price is due to the growth of risk-averse sentiments. The general nervousness dominating the markets after the extended American weekend has allowed dollar bulls to remind everyone of their presence. The dollar index is approaching the borders of the 103 figure, and the EUR/USD pair is testing the area of the 8th figure.
However, it may still be premature to talk about a stable downward trend today. The impulsive price drop is driven by emotions, which usually 'do not live long.' After all, if Waller voices dovish rhetoric, and key macroeconomic reports from China turn out to be in the green zone, it will be difficult for the dollar to hold its positions. Therefore, trusting the downward movement of EUR/USD is not advisable – at this moment, it is prudent to adopt a wait-and-see approach to the pair.