The US dollar index returned below the 90th mark during the Asian session on Wednesday, which indicated the end of the dollar rally. Yesterday, market interest in the US currency began to fade, despite the continuous political tension in Washington.
It should be recalled that the Democrats initiated the US president's impeachment by publishing a resolution accusing Donald Trump yesterday. However, traders actually ignored this fact. They also ignored the statement of the US Vice President, who officially refused to apply the 25th amendment to the country's Constitution today. All this suggests that the market's focus is shifting from political events in the US to macroeconomic factors. But the US dollar does not feel so confident in this direction, especially before today's publication of data on the US inflation growth. The second factor that weakens the dollar is the decline in Treasury yields, in particular, 10-year Treasury bonds.
Amid such trends, the euro/dollar pair managed to return to the area of 1.22 level, but it is unlikely to further rise. Buyers recovered some of the lost positions, but failed to break through the resistance level of 1.2230 (middle line of the BB indicator on daily chart), stagnant while waiting for information impulses. On the other hand, political factors have clearly lost their impact, although the unfolding events on Capitol Hill are naturally historic: Apparently, Donald Trump will become the first president in US history to be impeached twice. However, the market remains calm with this heated political tension in the Congress.
Traders weakening mood can be explained by the predictability of further political events. The Capitol attack not only shocked the global community, but also the currency markets, which reacted with a surge in anti-risk sentiment. This made the markets alarmed and nervous; hence, the growth of the US currency. However, the current situation is very different. Politicians worked out the political scenario, where each following move is predictable.
As an example, the Lower House of Congress approved a resolution during the Asian session on Wednesday, which urges the White House and US Vice President Mike Pence to remove Donald Trump from office. The resolution was supported by 223 congressmen, while 205 voted against. But Pence rejected it, reminding the Democrats that the 45th president's term ends in just a week. In this case, both sides acted absolutely predictably, so they did not provoke any unrest in the currency market.
The situation is similar with impeachment. The Democrats will use this until the end, although it will clearly fail. The point is not only Congressmen have no time to complete the procedure before the end of Trump's term, but they also lack at least 17 votes to approve a guilty verdict (Democrats in the Senate have only 50 out of 67 necessary). At the same time, it is most likely assumed that the House of Representatives will officially launch the impeachment process today by voting for the corresponding resolution (Trump will become the first US president to undergo the procedure twice). Despite this unusual situation, the US dollar is unlikely to benefit from it. Thus, it is possible that the market will ignore this vote as it ignored the vote on the application of the 25th Amendment.
Thus, dollar bulls have lost their foothold in the form of political instability in the States. In my opinion, the national currency will go on the defensive until January 20, when Joe Biden's inauguration will take place. During his ceremonial speech, the 46th president is likely to repeat his speech that the US economy will receive trillions of dollars as additional aid. In this case, the Treasury yield will increase again, pulling the dollar with it.
On the other hand, macroeconomic reports will guide the US dollar in the medium term. Initially, we are talking about the inflation data. Today, data on the growth of the consumer price index for December will be released. However, weak forecasts are unlikely to support dollar bulls: the general index should slightly grow, and on the contrary, the core index should significantly slow down. If both components come out in the sell area, EUR/USD buyers will have a reason for further recovery.
From a technical viewpoint, the price on the daily chart is located on the middle line of the Bollinger Bands indicator, and the trend indicators have not formed any clear and unclear signals. If the pair breaks through the level of 1.2230, this will indicate the priority of the upward direction. In this case, it will be possible to consider long positions with the first target at 1.2300 (local high) and the main target at 1.2330 (upper line of the Bollinger Bands on the daily chart).
