Overview of the EUR/USD pair. May 31. The US budget assumes an increase in spending. Why is it dangerous for the dollar?

4-hour timeframe

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Technical details:

Higher linear regression channel: direction - upward.

Lower linear regression channel: direction - upward.

Moving average (20; smoothed) - sideways.

CSI: -39.5096

On Friday, May 28, the EUR/USD currency pair showed some hope in terms of correction. However, the movement that occurred in the first half of the day was immediately replaced by a strong increase in quotes in the second. As a result, the pair went down 130 points from its local highs, and now it seems that it intends to resume the upward trend. Recall that last week, the quotes were mostly traded sideways, but at the same time, maintained an upward mood. We have already said that the upward movement is not in doubt, but it is very slow since, in the last two months of almost recoilless movement, only 560 points were passed up, which is equal to a daily increase of fewer than 13 points. Thus, the pair does not adjust much. Within one day, there may be two or three rounds of correction, which is better seen on the lower timeframes. But at the same time, the upward trend continues, and global factors speak in favor of further strengthening the US currency. By and large, nothing changes at all. We could now say that inflation or GDP in the European Union or the United States could affect something because the last year's trend at this time looks simple and banal. If six months ago we assumed that the US dollar was affected by the political crisis in the US or the social crisis, or simply by the figure of Donald Trump, who refused to recognize the election results, now we believe that almost the only factor that affects the movement of the US currency is the constant inflation of the US money supply. And here, nothing changes for the American economy. Money is constantly pouring in from the budget, stimulus packages, and the Fed as part of the QE program. And the most interesting thing is that the Fed has already announced its refusal to revise or, even more so, to curtail the quantitative stimulus program in the near future. So the money will continue to flow into the American economy.

But not only monetary incentives are united. Last week, US President Joe Biden presented the draft federal budget for the 2022 fiscal year. And this budget provides for spending at the level of $ 6 trillion, which is an absolute record for the post-war years. Biden said that the budget is designed to invest in American citizens, strengthening the economy, and improving the country's financial condition in the long term. It is noteworthy that the budget includes revenues of $ 4.17 trillion. The budget is again in deficit by $ 1.84 trillion. It is easy to guess where the budget deficit will be covered. That is, the missing money will again be printed or raised as part of the bond placement. The point is different. Budget spending has increased again, which implies that the economy will be saturated with even more money. At the same time, $ 4.17 trillion in revenue is already with a possible tax increase, which both Joe Biden and Janet Yellen have recently talked about. It is far from certain that the US Congress will eventually approve tax increases for corporations and rich Americans. According to unconfirmed information, at least 6 Democratic senators are against such a decision. The same applies to the expenditure part. It should be understood that the two incentive packages that were repeatedly mentioned earlier are invested in this budget. That is, the "social package" for $ 1.85 trillion and the "infrastructure package" for $ 2.25 trillion are invested in the budget for 2022 to accept everything in one mass. However, even here, not all Democratic senators support such spending. We only say "Democratic senators" because it will ultimately depend on them whether the budget is passed or not, whether taxes are raised or not. It is clear that all Republicans are against such huge spending and even more so against raising taxes for millionaires, billionaires, and corporations, whose interests they usually represent. However, this is all a policy that now does not affect the dollar exchange rate at all. The main point is that if this draft budget is adopted, with its expenditures of 6 trillion, then a huge mass of "new money" will again flow into the economy. Accordingly, the US dollar may experience pressure in 2021 and 2022.

Once again, it is worth recalling that such a voluminous and large-scale fiscal and monetary stimulus in the United States is carried out with one single goal - to keep China away from it. Last week, Joe Biden also said that China "wants to possess America and conquer it before 2035." Biden did not explain what exactly he meant. However, he noted that he had spent more time with Chinese leader Xi Jinping than any other world leader, hinting that he clearly understands the wishes and goals of the Chinese leader. Biden said that the total time of his conversations with the leader of the People's Republic of China is 24 hours, and they also traveled more than 100 thousand kilometers in China and the United States together. "The world is in a confrontation between democracies and autocracies. The more complex the world becomes, the more difficult it is for democratic countries to unite and reach a consensus. Xi Jinping firmly believes that China will have America by 3035 because autocracies can make decisions much more quickly," Biden said. Thus, Washington will do everything possible to ensure that the economic power of the United States remains the first in the world. Recall that, according to various forecasts, China's GDP may overtake the US over the next 25 years. Naturally, this will mean a change in the world's economic leader, which Washington cannot allow. Therefore, it will be ready to go to any spending and measures to stimulate its economy. Fortunately, he has the tools to do this. Well, the dollar will continue to fall with such a policy.

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The volatility of the euro/dollar currency pair as of May 31 is 61 points and is characterized as "average." Thus, we expect the pair to move today between the levels of 1.2129 and 1.2251. A reversal of the Heiken Ashi indicator back down will signal a possible new round of downward movement.

Nearest support levels:

S1 – 1.2146

S2 – 1.2085

S3 – 1.2024

Nearest resistance levels:

R1 – 1.2207

R2 – 1.2268

R3 – 1.2329

Trading recommendations:

The EUR/USD pair has started a new round of correction and is located below the moving average. Thus, today it is recommended to open new long positions with targets of 1.2251 and 1.2268 if the price is fixed above the moving average line. It is recommended to consider sell orders if the pair remains below the moving average, with the first targets of 1.2146 and 1.2129. We also remind you that the pair is now moving almost flat.

The material has been provided by InstaForex Company - www.instaforex.com

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