FX.co ★ Spring brought favorable effect on the dollar

The Fed showed signs of optimism for the first time in a year by raising the US GDP growth forecast for 2021 from 4.2% to 6.5%. Nevertheless, Jerome Powell stressed that the Central Bank intends to make decisions not based on expectations, but actual data. What this means in relation to the federal funds rate is clear, but perhaps the financial markets should also reconsider their views.

In March, the US dollar strengthened not because of, but despite macro statistics. Retail sales and industrial production declined in February, while claims for unemployment benefits unexpectedly rose. However, the USD index is moving steadily upward, armed with a large-scale fiscal stimulus from Joe Biden and expectations of a GDP acceleration soon. If the EUR/USD falls when the US economic surprise index decreases, primarily due to bad weather, then what will happen when the spring data comes to the attention of investors?

Dynamics of bond yields and the US economic surprise index

There are plenty of reasons for joy among fans of the US dollar. This includes large-scale fiscal expansion, the weakness of the US currency in 2020 - which is favorable for the economy, less strict isolation rules, and the arrival of spring, and with it warmer weather than at the beginning of the year. Is it time to sell EUR/USD with a target of 1.15? Perhaps, but let's not forget that there are always two currencies in any pair. If the eurozone or other countries begin to show signs of life, the bears on the USD index will still fight.

A hint can be provided by the data on business activity in Germany and the eurozone, the release of which will be the key event of the week by March 26, as well as the German business climate index from IFO. According to Fed Chair Jerome Powell, the US economy can provide assistance to those countries that are trying to find ground under their feet, including the currency bloc. It would be nice for the EU to speed up vaccinations, and not act like a clown in a circus. First, fight Britain, allegedly hindering the export of AstraZeneca, and then refuse this vaccine due to the alleged side effects.

Along with the ineffective distribution of vaccines against COVID-19 and problems with obtaining resources from the European Rescue Fund, headwinds for bulls on EUR/USD may blow from Alaska, where the first negotiations between the United States and China are underway since Joe Biden took office. The trade war between these countries in 2018-2019 contributed to the strengthening of the dollar against the yuan and the euro. The negative for the last two currencies, as history shows, is the rise in the yield of US bonds.

Dynamics of the yuan and the US-China bond yield differential

Technically, the "Broadening Wedge" pattern continues to be realized on the EUR/USD daily chart. As I noted in the previous article, the rebound of the euro from $1.199 followed by a fall below $1.193 creates prerequisites for sales with a target of 161.8% on AB=CD. In general, the level of 1.193 is a kind of red line: while the quotes of the pair are below it, you should give preference to shorts. Conversely, closing the day above the red line is a reason to buy.

EUR/USD, Daily chart