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FX.co ★ EUR/USD: Biden talks about tariffs on Chinese imports, dollar falls amid increased risk appetite

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Forex Analysis:::2022-05-24T11:30:20

EUR/USD: Biden talks about tariffs on Chinese imports, dollar falls amid increased risk appetite

The EUR/USD pair continues to show corrective growth, which is due not only to the weakening of the US currency, but also to the unexpected strengthening of the euro, which fell under the spell of the hawkish attitude of the ECB. Today, buyers have already tested the seventh figure, breaking the resistance level of 1.0670 (the upper line of the Bollinger Bands indicator on the daily chart) and, in fact, the 1.0700 mark. EUR/USD bears look confused—the information background is in favor of strengthening the upward movement, although the price increase can still be viewed through the prism of a large-scale correction after reaching 5-year price lows.

EUR/USD: Biden talks about tariffs on Chinese imports, dollar falls amid increased risk appetite

US President Joe Biden and the ECB gave an impetus to the growth of EUR/USD. Biden has increased risk appetite in financial markets, while the European Central Bank has noticeably tightened its rhetoric, specifying its hawkish intentions. Plus, the market has not heard "ultra-hawkish" statements from the representatives of the Federal Reserve in the context of a possible increase in the interest rate by 75 basis points at once. The Fed members confirmed that they are ready to increase the rate in 50-point steps (at least at the June and July meetings), but this scenario is already considered the baseline for the American regulator.

Such messages could not support the bears of the pair. Sellers of EUR/USD did not conquer the key support level of 1.0340 (although they got as close as possible to this target), after which they flattened around 4–5 figures. But without additional information support, the price a priori could not be on such long-term bottoms for a long time. It was necessary either to advance further downward or to retreat upward, yielding the initiative to the buyers of the pair. As a result, the second option worked: the dollar did not receive additional hawkish signals from the Fed, while the euro, on the contrary, received unexpected support from the ECB. Biden's statements yesterday only added to the fundamental picture in favor of further EUR/USD growth.

As you know, Biden recently made a trip to Asia, visiting South Korea and Japan. During his tour, he announced several landmark statements that influenced the foreign exchange market. In particular, he said that the United States is ready for direct military intervention in the event of Chinese aggression against Taiwan. Beijing sharply condemned Biden, after which the White House deciphered the words of its leader, saying that Washington is ready to provide Taiwan with only military means for protection, but no more.

Biden has also stated that the issue of duties on imports of Chinese goods to the US "is currently under consideration." According to him, he intends to discuss this issue with the country's Treasury Secretary Janet Yellen "in the very near future." This message from the American president was interpreted by some experts as a signal of the possible cancellation of certain duties.

Note that Yellen supports the abolition of some of the customs duties on goods from China, introduced under the previous US President Donald Trump. According to Reuters, the White House has even sparked controversy over this—US Trade Representative Katherine Tai defends the preservation of duties, while the head of the US Treasury insists that most of the tax tariffs on Chinese products must be reduced. Therefore, the fact that Biden announced his intention to consult with Yellen on this issue speaks volumes. At least, US stock indexes rose steadily yesterday amid a general increase in risk appetite. The greenback, in turn, was under pressure: the US dollar index fell to the 101st figure, although on May 13 it tested 20-year highs in the 105-point area.

Against the backdrop of these events, the euro is gradually strengthening due to the increased hawkish mood of the ECB. Its head, Christine Lagarde, played a key role here, saying that the European Central Bank could increase the deposit rate to zero by the end of September, "after which further increases are possible." This suggests that the regulator will raise rates following the results of the July meeting, as well as in September, after assessing the dynamics of inflationary growth in the eurozone. Earlier, other members of the European Central Bank spoke in favor of this scenario, in particular, the heads of the Central Banks of Germany, France, and the Netherlands. Even a dovish stance like Philip Lane (ECB chief economist) has expressed his loyalty to the hawkish scenario.

Thus, the prevailing fundamental background contributes to further corrective growth, especially if verbal speculation around the possible cancellation of some duties on Chinese products increases. But again, it is necessary to be careful here in the context of the opening of longs. As you can see, after overcoming the 1.0700 mark, the upward momentum began to fade, which indicates the unreliability of long positions. In my opinion, longs during the period of corrective growth are a priori risky, since any corrective pullback has its end point.

Given the continuing divergence of the positions of the Fed and the ECB (even taking into account the tightening of Lagarde's rhetoric), as well as against the background of geopolitical tensions, it is impossible to talk about a reversal of the EUR/USD trend. Therefore, at the moment it is advisable to adopt a wait-and-see strategy. When the correction finally fades, it will be possible to consider the option of short positions with targets of 1.0600 and 1.0530 (the average line of the Bollinger Bands indicator coinciding with the Tenkan-sen line on the daily chart).

Analyst InstaForex
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