The euro-dollar pair dives down, updating more and more new price lows: today, the EUR/USD bears were able to push the price to the level of 1.1850. The last time the pair was in this price range was more than two months ago - in early April. The pair falls almost without a pullback, and any attempts at corrective growth are "blocked" by sellers. The outcome of the Fed's June meeting served as a trigger, allowing dollar bulls to increase their pressure across the market, without any compromises. The greenback dominates in one way or another in all currency pairs of the "major group", but it is most pronounced in pairs with the pound, euro, and Australian dollar.
At the start of the US session on Friday, the dollar slowed its three-day growth, again puzzling market participants. Including the traders of the EUR/USD pair, who now have a completely natural question: is the current price pullback a correction or has the pair formed a price bottom? Should I open short positions from the current price levels or take a wait-and-see position so as not to fall into a drawdown?
A kind of "spring" has been compressed for several weeks since the publication of the April data on the growth of inflation in the United States. Inflation indicators showed record growth, significantly exceeding the forecast values. However, representatives of the Federal Reserve extinguished optimism about the prospects for tightening monetary policy, saying that on the basis of one release, the regulator will not revise its policy. In addition, the Fed representatives justified the growth of inflation indicators by the low base of last year. The dollar bulls were then forced to accept the dovish verdict.
However, the May figures repeated the trajectory of the April release. In particular, the overall consumer price index in May jumped to 5 percent (on an annualized basis): the last time the indicator was at such heights was in the summer of 2008, and before that, back in 1991. But this time, the reaction of traders was restrained: many experts assumed that the Federal Reserve would similarly ignore the record increase in inflation, complaining about the low base of last year. The unusual situation was also because the latest inflation release was released on the eve of the next meeting of the Federal Reserve when representatives of the regulator are required to observe silence. Therefore, traders could only guess how exactly the Fed will react to inflationary trends.
As you know: the stronger the spring is compressed, the faster it then decompresses. The "hawkish" notes of the June Fed meeting were clearly interpreted in favor of the US currency. And although we are talking about rather distant prospects (the rate is planned to be raised in the second half of 2023), market participants paid attention primarily to the tightening of the tone of the accompanying statement. At the same time, investors shrugged off the rhetoric of Jerome Powell, who voiced very cautious rhetoric about the slowdown in the vaccination process in the US, the uneven recovery of the labor market, and the decline in retail sales. In addition, the Fed did not meet the "hawkish" hopes regarding the fate of QE. The head of the Federal Reserve said that the members of the regulator want to first see "significant progress" in the economy – and only then start discussing the issue of tapering the stimulus program. At the same time, Powell rather vaguely voiced the time targets: according to him, the Central Bank may begin discussions on tapering the stimulus "at subsequent meetings, if progress in the economic recovery continues." At the same time, on the eve of the meeting, many experts were confident that at the June meeting, the head of the Federal Reserve would announce the tapering of QE, and at the August or September meeting, he would begin the practical implementation of this scenario.
However, all these fly in the ointment were ignored by the market. The dollar moves by the inertia of the "hawkish" remarks of the Fed, strengthening its position against a basket of major currencies. In the context of the EUR/USD pair, the situation was further aggravated by the rhetoric of the ECB's chief economist, Philip Lane. Yesterday, he said that, in his opinion, "it is still premature to talk about ending emergency bond purchases." Lane also said that the discussion of this issue will take place at the September meeting of the Central Bank. At the same time, he was skeptical about the likelihood of tapering QE this year. This de facto uncorrelation between the positions of the Fed and the ECB put additional pressure on the EUR/USD pair.
Thus, the fundamental background is not in favor of EUR/USD buyers. Given the strength of the downward momentum, we can assume that the pair will dive down at least to the borders of the 17th figure. In my opinion, the first "stop" is possible only at the level of 1.1780 – this is the lower line of the Bollinger Bands indicator, which coincides with the upper border of the Kumo cloud on the weekly chart.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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