The US dollar index is declining following the yield of 10-year treasuries. The greenback was unable to take advantage of the strong Nonfarm report, which was published last Friday. The report was published on the pre-Easter Friday, when the main trading platforms of the world were closed. The long weekend, which de facto ended only today, made its own adjustments to the trading process. Strong data on the labor market will have a noticeable effect in the future (for example, in the run-up to the April Federal Reserve meeting), but today the moment is gone: traders switched to other fundamental factors, which for the most part were not in favor of the greenback.
US President Joe Biden's large-scale economic plan to develop infrastructure has long supported dollar bulls. Rumors about the development of a new project appeared in early March. The American media bit by bit "squeezed" unofficial information using their sources in the White House. As a result, a fairly clear and comprehensive picture emerged, indicating that Biden is ready to raise some taxes for the implementation of infrastructure projects. However, information about the cost of the new plan varied: some insiders claimed that it was about three trillion dollars, while others voiced the amount of four trillion.
It is worth noting that all these rumors appeared when the "Plan to save America" (worth $1.9 trillion) had just begun to be implemented, increasing inflation expectations. The fundamental picture that was positive for the greenback was complemented by a strong Nonfarm report (both in January and February), as well as the shock rate of vaccination of Americans against coronavirus (The US is still leading here – the daily number of injections hovers around 2 million). As a result, the dollar shot up across the market, following the yield of treasuries, which also updated multi-month highs. However, then the US currency froze in place (having updated the annual low at 1.1704 against the euro), after which it gradually began to retreat. At the moment, the greenback is losing its position throughout the market, and the EUR/USD pair is no exception here: after pushing off from the price low, buyers were able to rise by 150 points, settling in the middle of the 18th figure.
This price trend is driven by several fundamental factors. To be more precise, two. First, the dollar has become a victim of inflated expectations of traders. As mentioned above, insiders initially reported that the volume of the new economic plan will be from 3 to 4 trillion dollars. In reality, Biden announced a different "price tag" - $2.6 trillion. Of course, this is also a very impressive amount, but the market clearly expected more.
The dollar bulls' second problem is the "obstinacy" of some senators who represent the Democratic Party. According to US media, at least six Democratic senators are not ready to support the White House's initiative to raise the corporate tax rate to 28%. One of the congressmen – Joe Manchin - publicly stated that the bill could not be approved in this form. Let me remind you that in the current circumstances, the opinion of even one Democratic senator is of key importance, since the Democratic Party does not have "spare" votes in the upper house of Congress. And if the Democrats do not unanimously support the bill, it will remain on paper. Republicans, in turn, reported categorical opposition to the tax increase.
Responding to the situation, White House Press Secretary Jen Psaki said that Biden "is ready to negotiate with Manchin and other senators." Different opinions are voiced in the media regarding the prospects of the presidential initiative. But it seems that most analysts are inclined to believe that the Democrats will eventually find a compromise solution. At the same time, many doubt that the bill will be adopted by July 4 (i.e., by the Independence Day of the United States) – most likely, the draft will be approved at the fall session of Congress.
Such assumptions exert background pressure on the dollar, although all the talk about the prospects for adopting an economic plan is hypothetical. The EUR/USD bulls took advantage of the greenback's situational weakness, as they were finally able to develop a large-scale 150-point correction. ECB representative Pierre Wunsch suddenly provided indirect support for the euro. He heads the central bank of Belgium and is also a member of the Governing Council of the European Central Bank. The official was quite optimistic about the prospects for the European economy, saying that he was "surprised by its stability." Wunsch also noted that if the economy continues to show stable growth then at some point the ECB will need to tighten monetary policy. And at the same time, he added that if the state of the economy worsens, the ECB can extend the validity of the PEPP (the program expires in March next year). Such comments spurred the growth of the single currency, also against the greenback.
And yet, this price pullback should be considered as a large-scale correction, not a trend reversal. At the moment, EUR/USD traders are testing the average line of the Bollinger Bands indicator on the daily chart (1.1850) – this is the first price barrier that buyers need to overcome. But even in this case, you can consider short positions on the pair to the bottom of the 18th figure. We can only talk about the first signs of a trend reversal when the pair has finally overcome the Tenkan-sen line on D1 (1.1910). In this case, the Ichimoku indicator will form a Golden Cross signal: this will allow the bulls of the USD/JPY pair to expect a return to the area of 20 figures – at least to the upper line of the Bollinger Bands indicator, which corresponds to the 1.2010 mark. If the growth momentum fades in the range of 1.1850-1.1910, the bears will quickly seize the initiative, resuming the downward trend.
