The dollar's growth on Wednesday was emotional: investors used the greenback as a protective tool against the background of a rather sharp decline in the stock market. The corporate reporting season in the US is gaining momentum, while the stock market is sensitive to the coronavirus failures of such giants as Boeing, Netflix or Alphabet. The major stock indexes - the Dow Jones, S&P 500 and NASDAQ Composite - ended trading in the red zone on Wednesday, and Federal Reserve Chairman Jerome Powell's pessimism only worsened the overall situation. Interest in risky assets has significantly decreased, but the safe dollar has become in high demand.
The prevailing fundamental picture on Wednesday made it possible for dollar bulls to ignore the dovish signals of the Fed. The dollar strengthened throughout the market, despite Powell's pessimism and the cautious theses of the accompanying statement of the Fed. But, as you know, emotional fundamental factors do not last long: dollar bulls did not have enough for a large-scale rally, and there are no corresponding arguments. Moreover, the disappointing results of the January Fed meeting will be repeatedly sold to the greenback in the foreseeable future. Now every more or less important macroeconomic report will be viewed by the market through the prism of the intentions of the US central bank.
Let me remind you that Powell denied rumors that the central bank may prematurely curtail stimulus programs. He said the Fed would remain committed to ultra-loose monetary policy. The current pace of $120 billion - a-month bond repurchases will continue until "substantial and sustained progress" is made on meeting employment and inflation targets. At the same time, Powell added that if necessary, incentive programs will be expanded. The central bank did not announce any clear criteria in this context, but in this case it is obvious that traders should focus on the dynamics of the labor market, inflation and the country's economy as a whole. It is for this reason that today's releases have turned the dollar 180 degrees, once again confirming its vulnerability.
The volume of US GDP in the fourth quarter increased by 4% in annual terms. The forecasts of most analysts were slightly higher at the level of 4.3%. At the same time, the country's economy jumped by a record 33% in the third quarter. In the fourth quarter, many components fell short of the forecast values. In particular, the indicator of personal consumption increased by 2.5%, with a forecast growth of 3.1%. The GDP price index increased by 1.5%, while analysts expected it at 2.2%. But one of the Fed's most closely watched inflation indicators – the PCE Core index, rose 1.4% in the fourth quarter after rising 3.4% in the previous quarter. It was not without anti-records: at the end of the entire last year, the US economy slowed by 3.5%. This is the first reduction since the 2008 financial crisis and the most significant in 74 years.
In other words, the release published today was not impressive, especially in the context of previous macroeconomic reports. The Nonfarm report was disappointing (unemployment rose and the number of people employed in the non-agricultural sector fell for the first time since April 2020), December data on durable goods orders fell short of forecasts, and retail sales came out in negative territory. Plus, weak inflation: the overall consumer price index slowed to 0.1% m/m in December.
By the way, yesterday Powell voiced his concern not only about low consumer demand, but also about the growing number of unemployed. And, as if in continuation of this topic, quite alarming figures were published on Thursday. The number of initial applications for unemployment benefits increased by 847,000. This indicator does not fall below the 800,000 mark for the third week ago. And although today this indicator came out slightly better than expected, the trend itself is negative, especially in light of the December Nonfarm.
But the euro, in turn, received support from macroeconomic statistics. German inflation surprised with quite strong figures, which became a harbinger of the growth of pan-European inflation. Thus, on a monthly basis, the overall consumer price index continued its upward trend in January, rising to 0.8% (with growth forecast to reach 0.4%). On an annualized basis, a positive trend was also recorded: the index came out of the negative area and reached the mark of 1.0% , with a forecast of growth to 0.7%. The regional reports of the German CPI reflected a widespread improvement in the annual inflation rate. The harmonized consumer price index also showed a fairly strong result, both in monthly and annual terms.
This result is a positive signal for the European Central Bank, as Germany is known to be the locomotive of the European economy. Today's release is largely offset by the statement made by the representative of the ECB Klaas Knot, which allowed a reduction of interest rates on deposits.
From a technical point of view, the situation has not changed: the EUR/USD pair is located between the middle and upper lines of the Bollinger Bands indicator on the daily chart, on the upper border of the Kumo cloud and on the Tenkan-sen line. Buyers of the pair still need to overcome the middle line of the Bollinger Bands, coinciding with the Kijun-sen line (1.2170) to confirm the strength of the upward movement. In this case, the EUR/USD bulls will be able to develop a growth momentum up to the 23rd figure. But sellers have a more difficult task: for the development of the downward trend, they need to break through the support level of 1.2040 – this is the lower line of the Bollinger Bands on the same timeframe. In my opinion, from the current position, we can consider long positions with the first target at 1.2170. As an alternative scenario, we can consider the option of opening longs after overcoming the 1.2170 mark – in this case, the initial goal of the growth movement in the medium term will be the 1.2205 mark (the Kijun-sen line on D1), and the main goal is 1.2310 (the upper line of the Bollinger Bands on the same timeframe).
