The dollar is punished for overconfidence

When there is too much negativity on the market, it can sadly end for bears. The sellers increased the EUR/USD quotes to the base of the 11th figure amid worsening European business activity and concerns of the ECB about a long period of slowing down of the eurozone economy. But, it did not take into account the fact that the States are experiencing problems due to trade wars. The fall in US purchasing managers' indices and disappointing statistics on the US real estate market contributed to the growth of fears about the imminent recession. The inversion of the yield curve and the increased likelihood of the Fed lowering the rate in 2019 to 78% hit the dollar.

If in 2018 the "American" perceived trade wars as a pretext for strengthening, then the situation changed in 2019. The USD index no longer has support from a large-scale fiscal stimulus and is ready to raise the federal funds rate of the Fed. Judging by business activity, the eurozone's GDP in the second quarter will slow down from 0.4% to 0.2% q/q, however, the growth rate of the US economy will decline from 3.2% to 1.2% according to the leading indicator from the Atlanta Fed. The escalation of the trade conflict between Washington and Beijing, coupled with growing recession risks, is a weighty argument in favor of increasing the chances of monetary expansion in the current year, which negatively affects the dollar position.

Dynamics of the probability of the Fed rate change


It seems that the EUR/USD "bears" overdid it and the fall in stock indices made the main currency pair go on a roller coaster ride and for some time return above 1.12. The development of the correction of the S&P 500 will help non-residents to flee from the securities issued in the States, which will result in a rollback on the USD index. In this regard, a logical question arises: Will trade wars really continue to support the US dollar as the currency of a country that is a potential winner of the conflict? In my opinion, the answer is no. The yen, the franc and gold regained the status of the main safe-haven assets. Therefore, weak statistics from the May purchasing indices of China's purchasing managers will contribute to a fall in world stock indices and the USD/JPY pair.

In order to cling to the lower limit of the medium-term consolidation range of 1.12-1.15, the EUR/USD bulls must go through the elections to the European Parliament and the release of data on German unemployment, retail sales and inflation. Improving the situation in the leading currency bloc economy will be a catalyst for the euro. The single European currency was supported by the pound in which the principle of "sell on rumors, buy on facts" was implemented. For a long time they were getting rid of the sterling because of the talk about the resignation of Theresa May from the post of prime minister, but as soon as it was officially announced, the GBP/USD pair began to grow.

Technically, the failure of the EUR/USD "bears" to consolidate below the support at 1.113 was the first sign of their weakness. A double bottom was formed, which increases the risks of activating and realizing the Wolfe Wave pattern with an initial target near 1.15. At the same time, a successful assault on resistance at 1.1265 will add optimism to the "bulls". In this scenario, the expanding wedge reversal pattern will become relevant.

EUR / USD daily chart


The material has been provided by InstaForex Company -