EUR / USD: Should I be afraid of the parliamentary elections in Spain?

The euro/dollar pair has once again demonstrated a southern impulse. However, yesterday's correction did not continue as the bears returned the price to the area of the 12th figure. Such price dynamics are fully justified because the single currency is now under pressure not only from the economic problems of the eurozone but also from political uncertainty in Spain.

However, Spanish politicians are the only ones that make traders nervous. In France, the protests of the "yellow vests" do not subside and in Italy, the trade unions recently protested, where representatives of the association of industrialists joined them. Experts warn that such sentiments on the eve of the elections to the European Parliament, which will be held in three months, are a wake-up signal to the markets. The popularity of populist and nationalist political forces is growing in the EU countries, so the results of the general European elections may unpleasantly surprise.

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According to preliminary forecasts, there will be more groups in the European Parliament, while representatives of large factions will not be able to repeat their previous results. This is fraught with the fact that the European Parliament will be fragmented, and coalitions will be created with great difficulty. In addition, according to a number of political scientists, Eurosceptics will block many initiatives, primarily in the sphere of migration legislation.

In this context, the latest German local elections look significant, which were held last fall. The results of the plebiscite showed that electoral preferences are changing in Germany and these changes are not in favor of European integration. The main sensation of the last election was the incredible success of the ultra-right. For four years, they strengthened their positions tenfold and were able to get into parliament, reflecting the prevailing attitudes in society.

In other words, factors such as the popularization of ultra-right political forces, the intensification of anti-immigration rhetoric and the increasing role of nationalist ideas weigh on the prospects for the development of the European Union. Similar trends can be reflected in the outcome of the pan-European elections. This fact puts pressure on the single currency, especially against the background of a slowdown in the key indicators of the eurozone and softening the rhetoric of the ECB.

Yet, Spain has become the catalyst for today's price decline of EUR/USD pair. There will be extraordinary parliamentary elections again for the third time in a row over the past four years. The deputies could not find a compromise on the proposed budget, forcing the prime minister to announce early elections. Thus, on April 28, the Spaniards will not only appreciate the work of the socialist government but also change the political format of the parliament - at least, many local experts are sure of it.

It should be noted here that the events in Spain should not be viewed only in a negative context. Despite the fact that any extraordinary elections are certainly stressful for the markets, their results can positively affect the single currency. The fact is that literally the other day there was a mass protest in Madrid, which was attended by tens of thousands of local residents. They protested against the country's Social Democratic Prime Minister Pedro Sanchez, who in their opinion, behaves "too liberally" in relation to the Catalan government and supporters of the separation of the region from Spain. In other words, the protesters spoke in favor of the unity of the country, expressing protest to the current government and parliament (until March 5), if pro-European political forces come to power (in particular, representatives of the Citizens Party) following the spring elections.

Despite such possible prospects, the market reacted negatively to today's events in Spain. Traders are focused on current events while long-term projections have little effect on the dynamics of the EUR/USD pair. Investors are concerned about the growing political uncertainty in the eurozone countries, as well as, the slowdown of the EU economy and vague prospects for Brexit.

In addition, the likelihood of a resumption of the trade war between the United States and China has increased again despite the ongoing negotiation process. According to Chinese leader Xi Jinping, trade negotiations will be resumed with their next round to be held next week in Washington. Representatives of the negotiating group avoid any specifics in their comments. The essence of their statements comes down to the fact that they have made some progress, although there is still a lot of work to be done. Such veiled statements alarm traders, given the fact that the "deadline" on March 1 is just around the corner.

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Thus, the single currency is still not strong enough to recover. In such circumstances, any more or less large-scale correctional growth of EUR/USD pair should be considered as an occasion to open short positions. The nearest southern target is 1.1230, which is the bottom line of the Bollinger Bands indicator on the daily and weekly charts. If the bears consolidate below this support level, they will open the way to the level of 1,1100, which is the bottom line of the Bollinger Bands but on the monthly chart.

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Euro flies into the abyss

The disappointing statistics on US retail sales for December only temporarily stopped the bears in EUR / USD. The US economy slows down to 2% in the fourth quarter, according to JP Morgan. The Fed does not begin to raise the federal funds rate in 2019, as the derivatives market shows, but the eurozone looks so gloomy that it's fit to talk about reanimation QE. Against this background, the fall of the euro to 3-month lows against the US dollar looks logical. The main thing is that sellers do not overdo it.

In the fourth quarter, German GDP almost fell into a technical recession, while European GDP grew by a modest 0.2% q / q. The problems of German industry, weak domestic and external demand are forcing the economy of the currency bloc to slow down. Many of the difficulties are most likely temporary. If the trade wars stop, then the export of the Old World will be able to rise from its knees, but who can guarantee that this will happen? That having dealt with China, Donald Trump will not take up the EU by increasing duties on European cars? But there is also Brexit and the related gap in economic ties with an important trading partner. Italy with its eurosceptics. The euro looks so weak that it is unable to resist even the deprived of the main trumps of the US dollar.

The "American" no longer expects aggressive monetary restriction and 3% GDP growth. About half of the hundreds of Reuters experts predict that the Fed has completed a cycle of tightening monetary policy, the rest believe that the central bank will raise the rate only once. Derivatives market gives only 2% probability of such an outcome. For comparison, the chances of lowering the rate are estimated at 12.5%. At the same time, statistics on the States, with the exception, perhaps, of retail sales, does not disappoint at all, and the divergence in the dynamics of economic surprise indexes creates a solid foundation for the downward trend in EUR / USD.

Dynamics of US economic indexes and eurozone surprises

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Obviously, against the background of decent data, the fall in the probability of the Fed normalization cycle continuing is entirely connected with the "pigeon" rhetoric of its representatives. In this regard, the publication of the minutes of the January meeting of the FOMC seems to be a test for the US dollar. However, the euro will have to go through the fire and copper pipes: a day later, on February 21, the statistics on business activity and the minutes of the meeting of the Governing Council will be released. I recall that during the press conference on its results, Mario Draghi spoke about the LTRO, which was the reason for the sales of the euro.

Equally important are the results of trade negotiations between the United States and China. Should the conflict escalate, capital flight to safe havens will accelerate the fall of EUR / USD. Only the presence of a breakthrough will allow the bulls to go to the counter.

Technically, bears on the main currency pair are making titanic efforts to bring quotes outside the trading range of 1.1265-1.1485. If they succeed, the risks of target realization by 127.2% on the "Butterfly" pattern will increase.

EUR / USD, the daily chart

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The dollar has risen significantly, is it worth selling it?

According to an analyst at Pacific Investment Management Company (PIMCO), Sachin Gupta, the uncertainty surrounding trade relations between the United States and the Middle Kingdom, as well as the slowdown in the growth of the global economy can support the already "expensive" dollar over the coming months. Therefore, at the moment he prefers to maintain a neutral position in relation to the US currency.

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"Where the dollar will go in the future will depend on whether the two largest economies in the world can reach an agreement. A truce will increase risk appetite and is likely to cause a weakening of the greenback in all directions, while the deterioration of relations can lead to the fact that investors will seek refuge in US currency. In this case, the dollar can rise in price even more", Gupta said.

A similar point of view is held by Erik Nelson, the currency strategist of Wells Fargo.

"The deterioration of statistical data in the US leaves it possible to remain neutral to the dollar over the next few months, given that the rest of the world is also experiencing a slowdown in economic growth. At the same time, mitigating the rhetoric of the Federal Reserve is leveled by the fact that other central banks also began to display dovish sentiments or lean toward a less hawkish position. If the dollar begins to decline, towards the end of the year, "he said.

Meanwhile, an economist at Goldman Sachs, Michael Cahill, believes that Fed Chairman Jerome Powell and his colleagues will be more and more sensitive to the bad news and ignore the positive, resulting in the likelihood of lower interest rates will rise and the dollar will fall.

In turn, experts of Bank of America Merrill Lynch believe that it is time to again sell the dollar against the yen.

"In the autumn, we recommended the sale of the dollar against the yen, and this made a good profit during the recent collapse that took place in December and early January. If the global stock market resumes decline in the coming weeks, the Japanese currency will regain the status of a safe-haven asset and rise in price. It is assumed that the short-term risks will not yet allow the Fed to tighten its position", they said.

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GBP / USD plan for the American session on February 15. Pound regained a number of positions after good retail sales

To open long positions on the GBP / USD pair, you need:

Pound regained a number of positions after good retail sales data, which turned out to be better than economists' forecasts. However, the technical picture remained unchanged. At the moment, bulls need to return to the resistance of 1.2826 and only a higher fixation will lead to a larger upward correction in the area of 1.2880 and 1.2944, where I recommend to fix profits. With the scenario of GBP/USD decline in the second half of the day, you can look at long positions at a low of this week around 1.2769 or buy a pound immediately for a rebound from a new low of 1.2723.

To open short positions on the GBP / USD pair, you need:

While the trade is conducted below 1.2826, the pressure on the pound will continue and the main purpose of the bears will be to break the week low of 1.2769. We can expect sellers to return to the market on levels lower than this, which will lead to an update of the area 1.2723 and 1.2672, where I recommend fixing profits. In the case of good news from Theresa May and Brexit regarding the timing of the postponement of the UK exit from the EU, the demand for the pound may return. In this scenario, you can sell on a rebound from a maximum of 1.2880 or 1.2944.

More in the video forecast for February 15

Indicator signals:

Moving averages

Trade is conducted in the area of 30- and 50-medium moving, which indicates the possible formation of the lateral nature of the market.

Bollinger bands

The volatility of the Bollinger Bands indicator is low, which does not give signals to enter the market.

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Description of indicators

MA (moving average) 50 days - yellow

MA (moving average) 30 days - green

MACD: fast EMA 12, slow EMA 26, SMA 9

Bollinger Bands 20

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The United States and China have not reached a trade agreement in Beijing

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The two-day US-China trade negotiations have ended, but further terms of cooperation have not been agreed upon. Nevertheless, both sides noted that there is still some progress on a number of important issues.

According to the latest data, the United States and the PRC decided to sign a general agreement in the form of a protocol of intent, which would later become the basis for a future trade transaction. Negotiations will continue next week in Washington.

The composition of the delegations is expected to remain unchanged, and China will continue to be represented by Vice Premier Liu He. From the US side, there will be US Trade Representative Robert Lighthizer and Finance Minister Steven Mnuchin.

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