During the Asian session, the US dollar index passed a significant psychologically level of 90.00, after staying in the 89th mark for the first time in seven weeks. The index continuously shows a strong downward trend since February 17, when the indicator reached its local high at around 90.94. Ever since, the US dollar has been an outsider in the currency market, while risky and commodity assets are in high demand.
It also includes the Euro currency which has its own reasons to strengthen. This fundamental background allows EUR/USD buyers to sharply move towards the level of 1.22, although in a gradual pace. Technically speaking, any hindrances to reach this target are not visible. Here, the nearest resistance is set at 1.2205, from which the upper border of the Kumo cloud on the daily chart coincides with the upper line of the Bollinger Bands indicator. The fundamental factors also favor the further growth of the price, but with one condition: The Fed should help the weakening USD.
Today, Jerome Powell will start his two-day speech in the US Congress. He will first submit a semi-annual report on monetary policy to the House of Representatives Financial Services Committee, and to the Banking, Housing and Urban Affairs Committee the next day. His speech will begin at approximately 15:00 (Universal time), although the main theme of his report will likely be released ahead of time.
Considering the importance of today’s event, it is quite risky to open any orders for the EUR/USD pair (both for sell/buy). This is because Jerome Powell can affect the fundamental outlook, allowing the US dollar to correct after a multi-day decline. At the same time, the Fed Chairman is not expected to deliver “hawkish” rhetoric, providing support to the national currency. However, there is a risk that the market will interpret Powell’s rhetoric in its own way, making individual conclusions. For example, if the Fed’s tone of speech will be quite optimistic, primarily regarding the US economic recovery pace in the second half of the year, then the market will come back talking about the fact that the Fed curtail QE earlier than expected. But, we don’t know yet if Powell will mention it in his speech.
Theoretically, his speech is expected to be not surprising, which is in line with his previous speeches. He recently stated that January’s real unemployment rate was near to 10%, against the reported 6.3%, while the weak dynamics of growth in the number of employed remains disappointing. According to him, labor market could take years to recover, but the Fed is determined to reach its employment target. Powell did not specify what the regulator’s “determination” would be, but it is clear that all such steps will be associated with further easing of monetary policy parameters. It is possible that he will specify his intentions during his speech to Congress today. But another option is more likely – the head of the US regulator will limit himself again to patiently stimulating the monetary policy, which is primarily important for the recovery process. In this case, the market reaction may be restrained: the US dollar will continue to decline, and the EUR/USD pair will approach the level of 1.22.
On another note, the US consumer confidence indicator will also be published today. Last month, it showed an increase after declining for three consecutive months. Experts believe that it will continue its upward trend this month, rising to the level of 90.2 points. However, if it moves in the “red” area again, then the US dollar may come under additional pressure.
As for Europe, the macroeconomic reports still favors the Euro currency. In particular, the German IFO business environment indicator published yesterday repeated the upward trajectory of the previously published reports from ZEW and PMI. There is clearly a general sense of optimism in the market, which is primarily associated with the growing process of vaccination against COVID-19. Also recently, the media began to talk about the effectiveness of vaccines. Israel is considered in this context, where 4 million of the 9 have already received the first dose of the drug, and almost 3 million have received both doses. According to the latest data from the Israeli Ministry of Health, vaccination prevents death from COVID-19 by 98.9%, and also prevents hospitalization by 95%.
Therefore, the general risk appetite is pushing the EUR/USD pair, while positive macroeconomic reports (IFO, ZEW, PMI) provide additional support to the euro amid a weakening USD. If Powell’s speech does not inspire the dollar bulls today, the pair will test the limits of the 1.22 level this week.
In this case, it is recommended to open long positions based on the results of Fed’s speech, especially on the downward recessions of EUR/USD pair, with the first target set at 1.2200. The breakdown of this target will open the way to the next resistance level 1.2290 (upper line of the Bollinger Bands on the monthly chart).
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.