The U.S. dollar continues to demonstrate a "mini-rally," strengthening its positions in all major currency pairs. The EUR/USD pair has fallen to the base of the 9th figure, although as recently as the end of last week, buyers were trying to consolidate above the 1.1100 target. The price spike occurred during the pre-holiday days, in conditions of a "thin market," so the current corrective pullback looks quite logical. The pair, one might say, has stabilized after the emotional surge at the end of last year.
It's noteworthy that the confident growth of the U.S. dollar index (which updated a nearly two-week high on Tuesday, returning to the 102nd figure zone) is occurring against the backdrop of an almost empty economic calendar. For instance, yesterday, during the European session, the final assessment of the PMIs was published (almost all indicators were revised upwards), and during the American session, the U.S. manufacturing PMI was released (it came out in the red, remaining below the key 50-point mark). Traders ignored these releases – the EUR/USD pair continues to confidently decline.
The greenback is in high demand amid a general flight from risk. Wall Street started the year with a decline – the main Wall Street indexes opened in negative territory, and the Nasdaq Composite Index fell by more than 1.5%. Negative dynamics were recorded in the technology, industrial, and consumer services sectors. Overall, the number of stocks that declined at the end of Tuesday's trading exceeded the number that closed in the positive territory (1550/1345).
One of the negative factors was last week's news from China, which states that the country's manufacturing activity slowed down again – the Purchasing Managers' Index (PMI) in December fell to 49.0 from the previous value of 49.4. The downward trend has been recorded for the third consecutive month. The structure of this report indicates that the key factor of the decline was weak external demand: the index of new export orders in December was 45.8 (this component has been decreasing for the 9th consecutive month).
Risk-off sentiments are growing amid heightened geopolitical tensions. Judging by recent events, the Middle East may flare up again. According to some experts, Israel and Hezbollah are now "closer than ever to full-scale war" following a recent strike near the capital of Lebanon against Hamas leaders. This (probable) military conflict will be much larger in scale compared to the current military operations against Hamas in the Gaza Strip, as Hezbollah has "a larger, stronger, and battle-tested organization, with a more sophisticated arsenal and real strategic preparation." After the aforementioned strike near Beirut, Hezbollah leader Hassan Nasrallah stated that "such actions will not go unanswered and unpunished."
Significantly, in light of these statements, U.S. Secretary of State Antony Blinken canceled a planned visit to Israel – "for security reasons." This is a very telling moment, indicating that events in the Middle East are unfolding according to a scenario of escalation, not de-escalation. Such a situation indirectly supports the safe-haven dollar due to the strengthening of risk-off sentiments in the markets.
The rise in Treasury yields also contributes to the strengthening of the American currency. In particular, the yield of 10-year U.S. government bonds has again approached the 4 percent mark after falling to 3.78% at the end of December.
Today, the EUR/USD pair remains under background pressure. However, traders may soon switch to "classic" fundamental factors that could turn the pair upward again. For instance, key data on inflation growth in Germany will be published on Thursday, and on Friday, the Nonfarm Payrolls and the Eurozone inflation growth report.
According to preliminary forecasts, the consumer price index in Germany will show an upward trend (as will the overall CPI in the Eurozone). Regarding the Nonfarm Payrolls, the forecasts suggest a weak growth in non-agricultural employment (160,000), an increase in unemployment (3.9%), and a decrease in the wage growth indicator. Given such forecasts, it's not possible to confidently talk about the prospects of a downward trend development.
By the end of the week, there may be increased confidence in the market that the ECB will keep rates at the current level at least until June, and the Federal Reserve will begin easing monetary policy already at the March meeting. Therefore, selling the pair still looks risky despite the clearly defined downward trend of EUR/USD.
From a technical point of view, the pair is approaching an important support level of 1.0910, which corresponds to the middle line of the Bollinger Bands indicator on the D1 timeframe. If the bears break through this target and the price consolidates below the 1.0910 mark, the Ichimoku indicator will form a "Death Cross" signal, where the Tenkan-sen and Kijun-sen lines will be above the price, and the Kumo cloud will be below it. This configuration will indicate a priority of short positions. In such a case, the nearest target of the downward movement will be the 1.0830 mark, corresponding to the upper border of the Kumo cloud on the same timeframe. Yet, despite the technical signals, one should refrain from selling EUR/USD ahead of the key releases this week.
