So, Joe Biden is the 46th president of the United States. All the procedural formalities were left behind: the leader of the Democrats took the oath of office and delivered the first speech as the head of state. And although it is a de facto ceremonial process, the markets reacted too nervously to what was happening. In particular, the dollar impulsively moved up and down, while not leaving the 100-point range (against the euro). Perhaps this is due to the fact that today was the final point in a long and difficult election campaign, which for many months exhausted not only politicians, but also many investors and traders. Well, in fairness, it should be noted that the "Trump era" has finally ended - at least for the next four years.
And here we can recall the behavior of the foreign exchange market when Donald Trump took office in 2017. He traditionally delivered the inaugural address, where the "red line" was one phrase - "America first". His speech was bright and promising. It is thanks to many of his promises that the dollar has grown after all, immediately after the election, he spoke about fiscal stimulus, tax cuts, pouring trillions of dollars into the country's infrastructure, and so on. Inspired traders have already independently supplemented this logical series – the recovery of the economy, rising inflation, high rates of monetary policy tightening. And as a result - the rise in the price of the dollar. As often happens, the foreign exchange market was ahead of events and pushed the greenback up in advance, starting only from the declared intentions.
However, just a few weeks later, optimism among traders ran out and the market felt the need for specifics. If fiscal stimulus – on what scale? If there is a tax cut, what kind of tax cuts? If we are developing the infrastructure – how fast and in what time frame? And so on. As a result, for almost the entire 2017 year (from February to November), the dollar consistently fell in price: for example, the EUR/USD pair rose by one and a half thousand points - from the borders of the fifth figure to annual highs around the 1.2050 mark.
Of course, it is impossible to talk about any cyclical nature regarding the long-term prospects of the dollar. But at the moment investors are similarly situated in a good mood, which is reflected in the dynamics of the stock market. In the run-up to Biden's inauguration, the major Wall Street indexes were heading for record highs: the Dow Jones industrial average rose 200 points, the S&P 500 index rose 1% (updating the daily record), and the Nasdaq Composite index jumped 1.6%. At the same time, the yield of treasuries is declining, as is the demand for a safe dollar.
Given the background of the issue, we can assume that all the fundamental factors that currently move the markets are emotional, and, therefore, unstable. In the very near future, traders will leave behind the inaugural experiences and focus on more mundane aspects.
If we directly talk about the euro-dollar pair, then the focus will be on the European Central Bank meeting, which will be held on Thursday, January 21. According to the overwhelming majority of experts, the first ECB meeting for this year will be of "passing". Take note that at the previous meeting, members of the ECB decided to increase the volume of the asset purchase program by 500 billion euros, that is, to 1,850,000,000 euros. Given this step, which was taken only a few weeks ago, it is highly likely that the ECB will take a wait-and-see position.
At the same time, ECB President Christine Lagarde can even voice relatively optimistic rhetoric, despite the decline in key inflation indicators. Cautious optimism may be associated with the mass vaccination against coronavirus, which started at the end of December in many EU countries. Pay attention to the ZEW indices that was recently published: the pan-European index of business sentiment rose to 58 points (contrary to forecasts of a decline to 53 points), and the German index-immediately to 61.8 points (a four-month high). It is likely that Lagarde will also focus on positive medium-term prospects, setting off negative macroeconomic releases. The ECB's wait-and-see attitude is also supported by the fact that the central bank has taken (collectively) quite large-scale measures, while excessive monetary stimulus is fraught with side effects.
Some currency strategists warn that Lagarde may worry about the negative impact of the high euro exchange rate on already low inflation. But here it is worth recalling that similar risks were voiced on the eve of the December meeting. While Lagarde stressed that the central bank does not set a target rate of the euro, so it will not artificially underestimate its value. The market is likely to ignore the "standard" phrase that the central bank is monitoring the situation related to the exchange rate of the single currency.
Thus, against the background of pessimistic expectations, the ECB meeting may support the EUR/USD pair, even if it turns out to be "passable". This will allow buyers to approach the first resistance level of 1.2205 again (the middle line of the Bollinger Bands, which coincides with the Kijun-sen line on the daily chart). If the pair's bulls can overcome this level, the price, firstly, will be between the middle and upper lines of the Bollinger Bands indicator on D1, and secondly, the Ichimoku indicator will form a bullish Parade of Lines signal, opening the way to the upper line of the Bollinger Bands, coinciding with the mark of 1.2330 in the medium term.
