EUR/USD: debates in US Congress, Powell’s dovish rhetoric, and increased risk appetite

By | May 18, 2020
InstaForex
EUR/USD: debates in US Congress, Powell's dovish rhetoric, and increased risk appetite

Over the past two weeks, the euro/dollar pair has been fluctuating within a wide flat channel with the borders at 1.0750 and 1.0890. On the one hand, the pair shows certain volatility (although, much less than in April and especially in March), but at the same time it does not cross the indicated boundaries. The pair loses its upward momentum as soon as it approaches the borders of the ninth figure. Meanwhile, the downtrend stops its development when reaching the level of seven as the bears have failed to test the support level of 1.0750. As a result, the pair is hovering in the range of 150 pips, reacting to the current news. Both the bulls and the bears manage to gain momentum from time to time.

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At the beginning of this trading week, the US dollar is extending weakness. Investors are concerned about the political struggle over the new 3 trillion dollar stimulus package aimed at supporting the US economy. In addition, the downbeat economic data has made the greenback less attractive for investors. Over the past two weeks, the United States released its key macroeconomic data, including non-farm payrolls and data on inflation. Unfortunately, the consequences of the coronavirus-driven crisis turned out to be devastating for the economy and could only be compared to the figures observed during the Great Depression. Some readings reached their historical lows. Against this background, it was widely speculated that the US Federal Reserve was going to cut interest rates to below zero. However, the Fed officials carefully commented on that and did not confirm these rumors, referring to the corresponding side effects. Notably, every time the regulator raised this topic, the dollar bulls started to act nervously. Last week, Jerome Powell put an end to these discussions: he strongly opposed the introduction of a negative rate. At the same time, he almost urged the Congress to pass a bill to provide additional stimulus package to the US economy.

On Friday, following the end of the trading session, the House of Representatives agreed with Jerome Powell, and the bill was finally adopted. But at the same time, it became clear to traders that the bill will most probably not come into force, at least in its current form. First, the Democrats’ initiative has been strongly criticized by the Republicans who control the upper house of Congress. Secondly, the bill was also criticized in the White House where Trump has the right to veto. According to representatives of the Republican Party, the Democrats use this legislative initiative as a means of getting public support ahead of the presidential election, which will take place in six months. In other words, Trump’s supporters, and even the head of the White House himself, made it clear that the US economy will not receive an additional $3 trillion stimulus. This fact put the dollar under significant pressure.

Meanwhile, Jerome Powell in his interview to CBS again insisted on the need for additional rescue package for the US economy. He also noted that the unemployment rate is likely to reach 25% before it begins to decrease, while the US GDP may decline by near 20% in the second quarter (year-on-year). However, today, according to Powell, more attention should be paid to “medical statistics.” He admitted that the recovery of the US economy may continue until the end of next year and “may depend on the coronavirus vaccine.”

Notably, according to the recent data, the number of coronavirus cases is steadily declining throughout the US. Donald Trump added that the vaccine from Covid-19 can be developed by the end of this year “or even earlier.”

Thus, the recent news was rather challenging for the dollar. The negative stance of the Republicans regarding the $3 trillion stimulus package may force the Fed to resort to additional measures to ease the monetary policy. Although Powell rejected the option of negative rates last week, he noted that the regulator has “a wide range of different effective tools” in its arsenal. Tomorrow, the head of the Fed will speak in the Senate Banking Committee, and most likely, he will elaborate on his intentions. Ahead of this event, the demand for the American currency fell significantly, which was reflected in the EUR/USD dynamics.

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Besides, the rumors about the new vaccine from Covid-19 have increased the risk appetite while the dollar, being a safe-haven asset, lost its appeal. Risk sentiment was also driven by news from China where demand for oil has significantly increased. Brent crude oil soared to the upside sending WTI higher as well. In addition, Wall Street opened the session with a rally and not only in the energy sector.

All of the fundamental factors stated above formed the correctional uptrend of the EUR/USD pair. However, placing long positions is still risky as the price is staying within the 150-pips flat range. First, buyers need to settle above the level of 1.0850 (the middle line of the Bollinger Bands indicator on the daily chart). Then, they need to break through the resistance level of 1.0890 (two-week high). And only when the price settles at the level of 9, it will be possible to consider placing long deals with the target at 1.0960 (the upper line of the Bollinger Bands which meets the lower boundary of the Kumo cloud).

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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