During the Asian session, the US dollar index paused its growth, after reaching a multi-month high of 92.523 that started from November 2020. The downward pullback was primarily due to a decline in 10-year Treasury yields. In particular, it made a sharp rebound after it reached a local high of 1.606%. Now, this indicator is at around 1.570%. There were no noticeable fundamental reasons for such dynamics – against the background of an almost empty macroeconomic calendar, the markets moved by the inertia of last week's events.
Yesterday's US stock market closed mixed, with key indices showing contradictory dynamics. Here, the Dow Jones index increased by 0.97%, the S&P 500 index declined by 0.54%, while the NASDAQ Composite index immediately fell by 2.41%. On the other hand, there was growth in utilities, telecommunications and finance. Negative dynamics, in turn, was recorded in the sectors of technology, health care and sales of consumer goods. In other words, it is impossible to say at the moment that the demand for risky assets has increased among traders.
In general, the whole fundamental background contributes to the US dollar's further strengthening. However, a consolidation is observed, as the initial informational impulse caused by the strong Nonfarm and Senate's adoption of the aid package has slowly faded. In this case, the dollar bulls paused, encouraging the preliminary results. In a pair with the EUR, the USD strengthened by more than 300 points. It should be noted that the EUR/USD pair declined from 1.2180 to the current level of 1.1850 for a week and a half. At the same time, the downward trend was almost recoilless. Although the US dollar has suspended its growth and shows temporary weakness, buyers were able to develop only a 30-point upward correction, which means that they are not able to reverse the situation for a pair.
The dollar, in turn, continues to enjoy increased demand for several interrelated reasons. One of the fundamental factors is the market's general confidence that the US Fed will be forced to tighten the parameters of monetary policy earlier than expected in response to the irregular growth of basic economic parameters, primarily inflation. All other factors (US macroeconomic reports, comments from the Fed representatives, the growth of treasury yields) are like confirmation of the main idea, which will likely push the dollar upwards.
In this context, we can consider the last Nonfarm data, which was not clearly viewed individually but through the prism of the Fed's possible intentions. The labor market is recovering at a faster pace compared to the FRS fall-winter forecasts, and this fact suggests that the US economy will show strong growth in the second half of the year especially amid cash injections, forcing the Fed to take appropriate measures. In response to such assumptions, Jerome Powell stated that the regulator will allow the US economy to relax first before starting to tighten monetary policy. However, his dovish rhetoric does not stop the dollar bulls. The market remains confident that the Fed will not be able to ignore the inflation growth and will eventually give up under the attack of objective arguments, curtailing QE ahead of time and raising the interest rate.
This is the reason why the results of tomorrow's release of US inflation for February are so important for the EUR/USD pair in particular, and for dollar pairs in general. According to forecasts, the general consumer price index should show positive dynamics – both on an annual and monthly basis (+ 0.4% m/m + 1.7% y/y). The core index should also show slight growth, excluding food and energy prices. In monthly terms, it is expected to rise to 0.2%, while in annual terms, up to 1.5%. If both components of the release emerged in the "green" zone, the US dollar will receive another reason to strengthen. Meanwhile, the growth in the US inflation will become another kind of hindrance for the EUR/USD pair to continue the downward trend.
It is recommended to make trading decisions on the pair based on the results of tomorrow's release. If inflation disappoints investors, buyers of the pair may decide on a larger upward correction. However, it is fair to note that the overall fundamental background remains in favor of the USD. In my opinion, the bearish mood on the EUR/USD pair still remains, given the dynamics of the US labor market, Senate's approval of the "American Rescue Plan" and the pace of vaccination against COVID.
The priority of short positions is also indicated by technical signals. On the daily chart, the pair continues to be below the lower line of the Bollinger Bands indicator and all the Ichimoku indicator lines, which shows a bearish signal "Parade of Lines". The first downward target is the "round" psychologically important level of 1.1800. The main target is located just below, that is, the support level of 1.1750 (lower line of the Bollinger Bands on W1 and the Tenkan-sen line on M1).
