The euro/dollar pair moves back: after an impulse rise to the level of 1.1496, the price is actively declining, returning to the area of 12-13 figures. The same dynamics is observed in other dollar pairs - the US currency is recovering after a strong fall. The dollar index rose from yesterday's low of 94.75 to the current level of 95.90. The price pullback of the EUR/USD pair is not only due to technical reasons – the unexpected support for the dollar was provided by US President Donald Trump. He reacted to recent events, and his comments served as a reason for a significant correction in many dollar pairs.
The head of the White House promised Americans tax breaks to mitigate the effects of coronavirus. Today, representatives of the Trump administration will consult with the Senate and Republicans in the House of Representatives to discuss the possibility of reducing the payroll tax "or significantly easing it." In addition, the US president urged "not to punish small, medium and large companies for forced violations in the field of hourly wages" in connection with the closure of the quarantine.
The US currency reacted positively to a possible reduction in income tax. Moreover, this step will be only an integral part of package offers. According to Trump, he will hold an extended press conference, presenting further economic steps in detail after meeting with Congress.
In other words, the White House intends to deal with the negative consequences of the epidemic not only with the help of monetary policy (the mitigation of which is completely dependent on the uncontrolled Federal Reserve) but also with the help of financial policy. This plot twist provided significant support to the US currency, since we can now depend on more restrained steps on the part of the Fed at the March meeting (and subsequent meetings this year). This fundamental factor, in fact, explains the corrective pullback of the EUR/USD pair.
However, it is believed that short positions still look risky on the pair. Firstly, the dollar is now increasing on expectations, which subsequently may not come true (high expectations often lead to disappointment). Secondly, Trump announced only consultations with Congress, and not specific economic measures. The result "at the exit" may be more modest compared to market scenarios. Thirdly, the actions of the White House may not serve as a substitute for the Fed's action: an immediate rate cut can still not be discounted. Almost all economists and currency strategists at major banks suggest further easing of the fed's monetary policy. The only question is how large-scale the actions of the American regulator will be. The most optimistic scenario assumes a 25-point rate cut in March with the announcement of further steps in April and June. But the market is increasingly likely to hear more radical versions of events: according to some analysts, the Federal Reserve will cut the rate by 50 basis points at once, while according to others, it will be by 75 points at once.
Tax exemptions can only be "taken into account" by members of the Fed, but in no way affect their determination to reduce rates – by 25, 50 or 75 points.
If we talk directly about the EUR/USD pair, it is also worth considering that the European Central Bank is in any case not capable of such large -scale and "aggressive dovish" actions as the Fed is capable of. Of course, the ECB can take the rate further into the negative area or expand the volume of QE; however, all these measures have the opposite side, that is, side effects. Therefore, the European regulator will probably act with caution (if it starts to act this month), especially in comparison with the possible decisions of the US Central Bank.
Thus, for the EUR/USD pair, it is now better to take a wait-and-see position. There are too many "unknowns" in the current equation. The price pullback is quite reasonable and explainable, but the further downward prospects of the pair are still unknown.
The technical picture of EUR/USD still speaks in favor of the upward movement. On the daily chart, the pair is still above the Kumo cloud of the Ichimoku Kinko Hyo indicator and above all its lines. The bullish signal "Parade line" indicates the potential for further price growth. In addition, the pair is located on the upper line of the Bollinger Bands indicator. This also indicates the bullish mood of traders. The upward scenario will not lose its relevance until the bears break through the level of 1.1080 (the lower border of the Kumo cloud on the same time frame). As the nearest goal of the upward movement, we can consider the level of 1.1496 – this is the price maximum of this year. In turn, stop-loss can be placed in the area of the first support level – this is the Tenkan-sen line on the daily chart (price 1.1190).
The material has been provided by InstaForex Company - www.instaforex.com