FX.co ★ EUR/USD. "Castle in the sand" or hazy perspectives of dollar bulls

The euro-dollar pair tested the 19th figure, updating the almost one-month price low. In early February, the EUR/USD bears similarly tried to go below the psychologically important target of 1.2000, but failed. However, this time the sellers were waiting for failure: as soon as the price pushed through the support level, buyers became more active for the pair, which returned the euro to the area of the 20th price level. And yet, in the first half of the day, the pair was still dominated by bearish sentiment, although in my opinion, there were no good reasons for a large-scale dollar rally.

By and large, the dollar is growing only on the difference in the approaches of the representatives of the Federal Reserve and the European Central Bank regarding the growth of government bond yields (US and EU, respectively). This bubble has been inflating for the second week – and if last week geopolitical factors also played a role in strengthening the greenback, today traders only track the dynamics of bond yields through the prism of relevant comments from representatives of the Fed and the ECB.

Looking ahead, take note that if we consider short-term time periods, then the dollar will probably still show itself here. But if we talk about the medium-term and (especially) long-term perspective, then the situation does not look so clear.

So, according to the general opinion of experts, the US currency is growing mainly due to an increase in the yield of treasuries against the background of a decline in the stock market. For example, the yield on 10-year US government bonds reached 1.403%-1.530% - the highest values since January 2020, when the US and China signed an agreement on the first phase of a trade deal. Just a few weeks remained before the start of the coronavirus crisis, and the markets managed to win back optimism about a new stage in relations between America and China. By the way, then the EUR/USD pair fell by more than 200 points – from 1.1070 to 1.0830. To date, government bond yields are rising for other reasons, but the safe-haven dollar has been, strengthening its position throughout the market.

It is noteworthy that the yield of European bonds is also growing, but the ECB's reaction to this fact is radically different from the Fed's reaction to the increase in the yield of treasuries. European Central Bank Vice President Luis de Guindos, in an interview with Portuguese journalists, said that the regulator is ready to resort to recalibrating incentive programs, including PEPP (emergency asset purchase program). According to him, the ECB is able to maneuver and is ready to take measures "in response to an undesirable increase in bond yields." A similar position was voiced by ECB President Christine Lagarde, announcing the use of specific countermeasures. She also expressed concern about the jump in government bond yields, adding that the ECB intends to use its tools to "prevent their further growth."

In turn, the Fed reacted much more restrained to the growth in the yield of treasuries. Commenting on the latest trends, Fed Chairman Jerome Powell only said that this situation has developed against the background of expectations of an increase in inflation. At the same time, he expressed confidence that inflation in the foreseeable future will not grow so much that it may cause concern on the part of the US central bank. At the same time, none of the members of the Fed hinted at a possible targeting of the yield curve of government bonds.

Such a contrast in the approaches of the Fed and the ECB was not in favor of the single currency – the very aggressive rhetoric of the representatives of the ECB against the background of a restrained and optimistic position of the Fed created a certain advantage for US securities over European bonds. This fact contributed to the weakening of the single currency against the greenback.

It is obvious that such factors can not serve as a basis for the reversal of the EUR/USD trend. The dollar certainly has an advantage in the moment, especially against the background of dovish comments from ECB representatives. But in the context of the medium-term perspective (and even more so long-term), it will be difficult for dollar bulls to keep their positions, relying only on the current situation with US debt securities. This "house of cards" is very vulnerable – for example, a disappointing report on Nonfarm (the publication of which is scheduled for Friday) can unsettle dollar bulls. Or if Powell (whose speech is expected on Thursday) looks at the growth of treasury yields from a different angle, at least indirectly hinting about targeting. Moreover, one scenario does not exclude the second.

In other words, the dollar bulls were able to develop a large-scale correction on rather shaky fundamental factors. Here, at least, it is worth recalling that both the January and December Nonfarm came out in the red zone, falling short of the forecast values, and Powell, during his speech to Congress, admitted that the growth of the US economy slowed significantly after a powerful spurt last summer. Here you can also recall the rhetoric of other representatives of the Fed (in particular, Brainard), the vague dynamics of inflation, and so on, and so on.

Thus, in my opinion, the strengthening of the greenback is short-term. For a week and a half, the demand for the US currency has been fueled by various fundamental factors, but their impact is limited. From the current positions, we can consider long positions with 1.2110 as the first target – this is the Tenkan-sen line on the daily chart. The next intermediate resistance level is located on the upper border of the Kumo cloud on D1, while the main resistance level (the medium-term growth target) is located slightly higher - it is around 1.2200 (the upper line of the Bollinger Bands on the same timeframe).