4-hour timeframe
Technical details:
Higher linear regression channel: direction - downward.
Lower linear regression channel: direction - upward.
Moving average (20; smoothed) - downward.
CCI: -176.6481
The EUR/USD currency pair resumed its downward movement over the past day, meaning that the US dollar rose in price again. Naturally, a huge number of analysts immediately stated that the yield of US bonds continues to grow, and accordingly, the US dollar is growing. In the last week, almost all the events in the foreign exchange market are explained by the growth in the yield of treasuries. We can only wonder how it was before the indicator of the yield of state bonds did not affect the dollar exchange rate? Since April 1 last year, the yield of US government bonds has only grown. The indicator started with a value of 0.5%, and now it is at a value of 1.5%. And now let's remember what dynamics the US dollar has shown over the past 12 months? It fell, in our view, because of the huge amounts that the US government and the Fed poured into the US economy to stimulate its growth. Then what about the state bonds? If their yields have been rising over the past year, why has the US dollar been mostly declining at the same time? And only in the last week, the foreign exchange market explains the strengthening of the US currency by the growth of bond yields?
To begin with, a government bond is a debt security. Simply put, the government of any country can borrow at a certain percentage (the yield of the bond) from anyone, giving him a bond in return and as a guarantee. Thus, the yield of the bond is set by the markets. If no people are willing to buy a bond under 1% of the yield, then the yield increases, and so on. This indicator is usually associated with inflation and the key rate. Simply put, if the inflation rate in the country is 2%, then hardly anyone will be interested in the yield of security of 1%. In this case, all profits will be eaten up by inflation. The same applies to the key rate. If it is equal to 2%, and the yield of the bond is 1%, then the investor will carry the money to the nearest bank, since the deposit rate will be much higher than the yield of the bonds. Given how many trillions of dollars the US government poured into the economy in 2020 and how much more it will pour in 2021, as well as remembering such a phenomenon as deferred demand, there is no doubt that inflation in the coming years in America will accelerate and may even reach an uncontrolled level. Thus, none of the investors now wants to invest in US government securities, knowing that in six months or a year, inflation will jump up and all the interest on the treasury will be eaten up by it. Therefore, bond yields are rising, otherwise, no one will buy them at all. And, most likely, this process will continue.
But what is the correlation between the yield of treasuries and the dollar exchange rate? First, it should be noted at once that it does not happen that in a certain period only one factor affects the exchange rate of a particular currency. That is, even if the growth factor of the treasury yield does cause the dollar to rise against the euro, this does not mean that only this factor works at this time. Secondly, if the yield of treasuries increases, it means that the demand for securities is weak and insufficient. Accordingly, to encourage investors, the yield increases. If it continues to grow for a long time, it means that the demand for treasuries is low. Thus, the demand for the dollar for purchases of these same treasuries is also low. Foreign investors do not run to buy the dollar to spend it on US government bonds, and domestic investors do not get rid of the dollar to buy the same securities. As a result, the demand for the dollar does not grow, the supply does not decrease. Then why should it grow at all, if the two key factors determining the exchange rate do not change? Thus, we believe that the growth factor in the yield of treasuries is nothing more than a convenient explanation for everything that is happening in the market right now. As we said in our last fundamental articles, many factors can hypothetically affect the dollar right now. Therefore, it is very difficult to understand the question of which of them has an impact and which do not. And here there is a ready-made explanation for everything – the yield of treasuries is growing. That's why everyone uses it.
We can now list a dozen factors that at this time can have a positive impact on the dollar exchange rate. However, let's first figure out what panic is all about. From last Thursday to this day, the US currency has increased by 200 points. What is unusual about this movement? It was quite sharp. From January 7 to January 18, the euro/dollar pair fell by 300 points, and the yield of treasuries then also increased. Why in January, no one spoke about US bonds as the reason for the growth of the dollar? We would also like to note the following: since March 22 last year, that is, almost 12 months, the euro currency has been growing. During this time, it has grown by 1,700 points. During this time, there were three correction areas, including the current one, and during each one, the price was able to adjust by no more than 350 points. Thus, the current strengthening of the US dollar may be a banal technical correction. Moreover, now no one doubts that the new package of stimulus measures from Joe Biden will be approved by Congress and the Senate, so at least another $ 2 trillion will flow into the economy in 2021. This may cause a new fall in the dollar, as its supply in the market will increase. Due to the same deferred demand, much more money can flow into the economy than we can imagine. We remind you that from the last incentive program, there is still 1 trillion unspent money. Thus, the 3-4 trillion dollars that will saturate the economy this year is a more realistic figure. And this is open information. Therefore, the market can now act according to the banal scheme of acceleration before new protracted growth. The dollar is getting slightly more expensive so that traders can sell it at a higher price. Thus, we believe that the option of a long-term fall in the dollar remains a priority. However, we remind you that any fundamental theory requires supporting technical signals.
The volatility of the euro/dollar currency pair as of March 5 is 94 points and is characterized as "high". Thus, we expect the pair to move today between the levels of 1.1883 and 1.2071. A reversal of the Heiken Ashi indicator to the top can signal a round of upward correction.
Nearest support levels:
S1 – 1.1963
S2 – 1.1902
S3 – 1.1841
Nearest resistance levels:
R1 – 1.2024
R2 – 1.2085
R3 – 1.2146
Trading recommendations:
The EUR/USD pair resumed its downward movement. Thus, today it is recommended to keep open short positions with targets of 1.1963 and 1.1902 until the Heiken Ashi indicator turns up. It is recommended to consider buy orders if the pair is fixed above the moving average with a target of 1.2146.
