EUR/USD. The struggle for the 10th figure: fate of the upward trend in the hands of the “Union of Opposition”

By | May 20, 2020
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EUR/USD

The euro-dollar continues to show bullish sentiment. Today, buyers approached the boundaries of the 10th figure – the last time the pair was in this price area was almost three weeks ago – in early May, when traders massively recorded profits amid a downward turn in the buzz around the dollar. At that time, the EUR/USD grew because the greenback weakened, while the situation is radically different today. However, the dollar still remains under the background pressure: political strife around an additional anti-crisis package did not make it possible for dollar bulls to emerge at a decisive moment – as part of the downward pullback, sellers were unable to return to the eighth figure, and this fact fueled interest in long positions. In the next stage of the battle, the bears lost again, allowing their opponents to go above the resistance level of 1.0950. Now the tenth figure is at stake, and if sellers are also defeated here, we can talk about the first signs of a trend reversal.

There are certain prerequisites for this. The fact is that all previous growth impulses were caused only by a weakening dollar – the European currency passively followed the greenback, which showed either a slight increase or a slight decrease. The pair obediently focused on the dollar, starting from the lower or upper border of the almost 150-point price range (1.0750–1.0890). However, to date, the euro has ceased to be led and has proved to lead. The pair was able to break out of the above price range only due to the euro’s growth and the phlegmatic nature of dollar bulls. Now the fate of the upward trend depends on the fate of Merkel’s plan to restore the eurozone economy. If this initiative is supported by all EU members, the pair will receive a powerful argument for their further growth.

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Let me remind you that Berlin and Paris have proposed to create a fund for the recovery of the European economy worth 500 billion euros. This idea was received in different ways in Europe: for example, the countries of the south (in particular, Spain, Italy, Greece) supported this initiative. The head of the European Commission and the ECB president also expressed their support. The main opponent of Merkel in this issue was Austria. In Vienna, they said that they do not support the idea of Germany and France, so together with three other EU countries, they will prepare an alternative proposal involving the issuance of loans instead of subsidies.

By and large, this is the continuation of a fairly long dispute over the so-called crown bonds – only now the question is somewhat different: whether to provide free grants to the countries affected by COVID-19 or still loans? It is noteworthy that now Germany is on the side of the south, which is important, and I would say a key ally. Germany previously strongly opposed crown bonds, while now they are with the same zeal defending Merkel’s proposal to create a 500-billion euro aid fund. The French are not far behind the Germans, who are also actively lobbying for a joint initiative. According to some experts, if this scenario is implemented, most EU countries will depend on the two most powerful powers. This will enable Paris and Berlin to advocate for a more integrated, interdependent Europe, while strengthening their own positions in relation to other countries.

Thus, the European continent is again divided into two camps – some support the plan to restore the eurozone economy, while others oppose. Only now the forces are clearly unequal: such political heavyweights as Germany and France have moved to the side of the south. Whether a kind of “Union of oppositionists” (Austria, Denmark, the Netherlands and Sweden) will be able to insist on their own is, of course, an open question. But judging by the dynamics of the pair, market participants are confident that in the framework of informal negotiations, representatives of these countries will still change their point of view and eventually vote for the creation of an aid fund.

The pair was indirectly supported by very good reports from the ZEW Institute, which were published on Tuesday. Thus, the German business activity index was projected to reach 30 points, but eventually jumped to 51. The indicator was below the key 50-point mark since January last year, so this landmark event could not be ignored by the market. The pan-European index also increased significantly, exceeding forecast values (growth to 46 points instead of a decline to 24). Such trends have become an additional argument for the recovery of EUR/USD.

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But nevertheless, the key to the pair’s growth is in the hands of the leaders of the EU countries – this is especially true for those states that now act as oppositionists. If they demonstrate their “negotiability”, the euro will conquer the tenth figure, indicating new price horizons. Otherwise, the bears will seize the initiative and the pair will return to the region of the eighth figure.

Thus, at the moment, the pair retains the potential for further growth, but, due to the uncertainty regarding the position of the four European countries (the fifth country, Hungary, may soon join them), it is advisable to open long positions only if they consolidate above 1.1000. In this case, the bulls will clear their way to the next resistance level, which corresponds to the 1.1060 level – this is the upper border of the Kumo cloud on the daily chart and at the same time the Kijun-sen line on the weekly.

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

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