The bears of the euro-dollar pair declined to the support level of 1.0870 (the lower line of the Bollinger Bands on the D1 timeframe) on Wednesday but did not dare to storm this price barrier. Most traders took profits, allowing EUR/USD bulls to organize a small counterattack.
The pair have been diving down for almost a week – on March 31, buyers updated the local high at 1.1185, but could not stay within the 11th figure. On the same day, the pair collapsed by more than a hundred points. In the following days, up to today, the bearish sentiment prevails for the pair, due to the strengthening of the safe dollar and the weakening of the euro against the background of geopolitical tensions and the impending energy crisis.
Looking ahead, it should be noted that the longs for the pair are now unreliable, regardless of the "scale" of the upward pullback. In my opinion, a real turning point towards up will occur simultaneously with the conclusion of an agreement between Russia and Ukraine. It is too early to talk about this today: the negotiation process continues, and no one can say with certainty when exactly the parties will reach the finish line. The optimism associated with the results of the Istanbul meeting has gradually dried up – in this regard, traders need constant information feed of an optimistic nature, which is not there. And in the conditions of the information vacuum that has formed, the dollar has again come to the fore, against the background of a decrease in risk appetite.
In addition, the dollar feels support from the Fed, whose representatives have recently tightened their rhetoric. The "hawk wing" of the Federal Reserve is expanding – there are more and more supporters of a 50-point rate hike. The head of the U.S. regulator Jerome Powell also allowed the implementation of this scenario, fearing "the rooting of a high level of inflation." Powell's colleagues – in particular, Waller, Daly, Barkin, Mester, Brainard, Bullard - also started talking about a more aggressive rate hike. There is also an opinion that the regulator will decide on a 50-point increase not only in May, but also in June. At least, analysts of the conglomerate Goldman Sachs are sure of this. Moreover, San Francisco Fed President Mary Daly recently confirmed that the Fed may start reducing the balance sheet as early as next month.
Such prospects push up the dollar, which follows an increase in Treasury yields. For example, the yield on 10-year U.S. government bonds has already risen to 2.637%. This is a long-term record. The last time the indicator was at this level was in February 2019. Hawkish expectations, which have only been increasing lately, allow dollar bulls to feel confident in almost all dollar pairs of the "major group." And including in a pair with the euro, which in turn is under significant pressure from the negative fundamental picture.
And it's not just the ECB's passive and unconsolidated position against the backdrop of record inflation growth in the eurozone. The single currency is also under pressure from other fundamental factors – political and economic nature. As you know, European countries have faced a sharp increase in prices for Russian gas. On Friday, the cost of blue fuel exceeded the $1,500 mark. This week, the price has slightly decreased (May futures on the Dutch TTF hub are trading today near $1,160 per thousand cubic meters), but still remain at a high level.
Europeans are worried about the future prospects: the first payments for gas in rubles should take place at the end of April or in May (depending on the contract), while many EU countries (in particular, Germany and France) have announced that they will continue to pay for Russian gas in euros or dollars. According to experts interviewed by Bloomberg, the EU will need additional volumes of "blue fuel" even with the onset of the summer season in order to replenish gas storage facilities before the next autumn-winter period. In other words, the "gas issue" acts as a kind of anchor for the euro.
In addition, the market is gradually starting to "get involved" in French political events. Yesterday it became known that five days before the first round of the presidential elections in France, Marine Le Pen managed to sharply narrow the gap from the incumbent head of state Emmanuel Macron. According to experts, such results of the latest opinion poll increase the intrigue in the second round, scheduled for April 24.
In 2017, when the previous presidential elections were held in France, the euro sank quite strongly throughout the market, since all the contenders (except Macron) took either too left or too right political positions. And the main fear of investors was inspired by Le Pen, who at that time promised to withdraw the country from the EU and from the eurozone. Around her unusually high rating and desire to occupy the No. 1 cabinet in France, the main passions unfolded. As a result, Macron won the election, after which the European currency gradually began to regain its position.
Today, history repeats itself – Le Pen is among the favorites of the election race. And although in recent years she has significantly softened her rhetoric (including regarding Frexit), her possible rise to power worries investors. This factor also exerts background pressure on the euro.
Thus, there are no grounds for a reversal of the downward trend for the EUR/USD pair at the moment. It is advisable to use price corrections to open short positions with the first target of 1.0870 (the lower line of the Bollinger Bands indicator on the daily chart). A breakdown of this support level will open the way to the annual price minimum – that is, to the target of 1.0806.
