The risks of the second wave of pandemics and an escalation of the US-China trade conflict have returned investors’ interest in the dollar. As soon as the S&P 500 turned down, the rest of the G10 currencies lost strong support and began to remember their own weaknesses. The euro has plenty of them. Along with the recession, the inability of governments in the currency bloc to agree on ambitious fiscal stimulus (the use of resources of the European financial stability fund up to 2% of GDP seems a halfway measure) and unresolved issues for Brexit, it added an unexpected verdict of the German court on QE, which could trigger a constitutional crisis in the EU.
The success of the US dollar could have been more significant if not for the rumors about the Fed’s introduction of a negative federal funds rate and the reluctance of US stock indices to go south. If in April they grew thanks to hopes for a V-shaped economic recovery, in May, investors are in no hurry to get rid of stocks, even in the face of losing faith in a rapid rebound in GDP. I believe that one of the reasons is the outperformance of the S&P 500 and other “Americans” over their global counterparts. It shows that the United States is likely to get back on its feet faster than the rest of the world, which increases the chances of implementing the dollar smile theory.
Dynamics of stock indices
“Bulls” for EUR/USD are strained by the mouse fuss over the relationship between China and the United States. It seems that the chief negotiators on both sides expressed confidence in fulfilling their obligations under the January agreement, but this was not enough for Donald Trump. Not only did the owner of the White House forbid the federal pension fund, which manages about $ 600 billion, to buy Chinese shares, but he also began to talk about a complete break in US relations with the Middle Kingdom. What happens in this case? According to the President, the United States will save $ 500 billion on foreign trade.
At the same time, Donald Trump calls on the Fed to make a gift to the economy in the form of reducing the federal funds rate below zero. Although Jerome Powell and his colleagues reject this idea, the futures market still expects negative rates by June 2021. They say that recent history knows many examples when the Central Bank first resisted, and then did what the owner of the White House wanted. Along with the projected expansion of the Federal Reserve’s balance sheet to $ 9.63 trillion by the end of next year, rumors of a drop in borrowing costs below zero do not allow the “bears” for EUR/USD to develop an attack.
The main events of the week to May 22 are the releases of data on the German economic sentiment index from ZEW and European business activity from Markit. Leading indicators will give a hint on which way the Eurozone economy will go. Their growth will allow the euro to recover and create prerequisites for opening long positions on the breakout of the resistance at $ 1.09-1.091. Technically, the pivot level and the upper border of the “Rhombus” pattern are located near this area. On the contrary, sales of EUR/USD will become relevant in the event of a confident storm of support at 1.077-1.0775.
EUR/USD, the daily chart
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
Performed by Marek Petkovich,
InstaForex Group © 2007-2020
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