FX.co ★ New round of dollar decline just around the corner, or is it too early for the bears to celebrate victory on the USD?

After updating record highs, key US stock indexes seem to have decided to take a breather.

In the absence of new ideas, investors began to partially take profits on long positions, as a result of which the market moved to consolidation at the achieved levels.

The reason for the recent recovery was the hopes for the early adoption of the next package of assistance to the US economy, but in general, its prospects look ambiguous.

The foreign exchange market is also in a state of uncertainty.

Traders discuss the $1.9 trillion fiscal stimulus of the package that was announced earlier by US President Joe Biden and its impact on the dollar.

On the one hand, it is expected to accelerate the economic recovery in the United States compared to other countries, supporting the dollar. On the other hand, this is the main driving force behind the story of global deflation, which should lift riskier assets at the expense of the dollar.

Westpac believes that the latter point of view is beginning to prevail, given that after a strong start to the year, the greenback has begun to weaken again.

"Disappointing US employment data for January undermined the dollar's position, cast doubt on the narrative of a more successful US economy, and refocused minds on the prospect of a sustained reflationary fiscal and monetary policy in the country," the bank's strategists said.

"If the dollar continues to fall, in the coming days it may test the mark of 90 points," they added.

Meanwhile, the EUR/USD pair is trading in a narrow range for the third consecutive day.

The comments made yesterday by the heads of the Federal Reserve and the European Central Bank did not have a significant impact on the balance of power in the pair.

Fed Chairman Jerome Powell said that the central bank will not tighten monetary policy until the US economy reaches a state of maximum employment, and inflation in the country does not accelerate to 2%.

US consumer prices rose 0.3% in January, but the underlying indicator remained unchanged.

In his words, even if prices rise in the coming months, it will not matter much to the central bank.

ECB President Christine Lagarde also doesn't see rising inflation as a problem. In her speech, she said that inflation in the EU has not yet approached the central bank's target level in the medium term, and against this background, the ECB prefers to maintain the stimulating nature of monetary policy.

Lagarde's statement turned out to be more soft than last month's comments, when ECB officials suggested that if financial conditions in the EU remain favorable, they will not need to use the emergency asset purchase program (PEPP) in full.

The USD index is trading around 90.3 points, just above the two-week low reached the day before. At the same time, the euro is staying near its highest levels since the beginning of February against the dollar.

Next, we expect the EUR/USD pair to surpass the 1.2200 level, which will allow it to continue moving to 1.2300 and further to 1.2500.

Meanwhile, any new decline below 1.2000 after confidently rising from the 100-day moving average will mean a serious blow to the dollar bears.

At the same time, the USD index will have to fall below 90 points to give a signal for the dollar to leave for a new round of decline.