Although the strength of the EUR/USD downward trend remains questionable, the dollar continues to be in high demand

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After a sharp drop noted the day before, the US stock market rose steadily on Tuesday. In particular, the S&P 500 index added 1.5%.

Apparently, market participants were pleased with the fact that the yield of US treasury securities stopped falling. On Tuesday, the indicator for 10-year bonds reached the lowest value since February in the area of 1.139%, after which it rose above 1.20%.

Low bond yields hinted at a further decline in the S&P 500, reflecting investors ' doubts about the rosy future corporate earnings reports, as well as the overvaluation of stocks.

However, the stock market correction that was outlined turned out to be a false start. Although the stability of growth remains questionable, it seems too early to talk about the beginning of a bearish phase of the market.

The spread of the COVID-19 delta variant in the world causes serious concern, but the health systems of countries with a high percentage of vaccinated people are still coping, and therefore investors are ready to buy out drawdowns.

In addition, there is no reason to expect a remake of last spring, at least due to the fact that monetary incentives do not stop and the volume of asset purchases by the Fed is still about $120 billion per month.

With such support from the central bank, a serious correction in risky assets cannot happen yet. In addition, the fear of the coronavirus can force the Federal Reserve to soften its rhetoric.

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If the central bank postpones the start of discussions on curtailing incentives, this will lead to a weakening of the dollar.

So far, the US currency is not averse to updating peak levels since the beginning of the year.

The greenback seems to have received serious support from risk aversion, Westpac notes.

"The dollar is now in pretty good shape and is likely to continue to strengthen until the conference in Jackson Hole, where the Fed may announce a reduction in bond purchases. Therefore, investors will probably prefer to hold long positions on USD for the next few weeks, " the bank's strategists believe.

This week, the USD index broke the mark of 93.00 points and came close to the levels of almost four months ago.

A break above 93.43 (the March high) will allow dollar bulls to aim for 94.00 (the round level) and then – at 94.30 (the November high).

The EUR/USD pair has been declining for the fifth day in a row against the background of steady demand for safe haven assets.

The protective dollar benefits from concerns about the growth of viral infections in the world. The greenback is also supported by expectations that the economic power of the United States may lead to an earlier rise in interest rates in the country.

The growth of consumer prices in the United States is one more advantage for the dollar. In the euro area, the CPI index slowed in June to 1.9% from May's 2%, while the same indicator in the United States increased by 5.4% from 5% recorded in the previous month.

If inflation in the country continues to accelerate, then sooner or later the Fed will still have to respond to this by starting to reduce QE. And there, it's not far from raising interest rates.

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The growth of US GDP at the end of this year may become a record for almost 40 years, reports The Wall Street Journal.

According to the consensus forecast of experts surveyed recently by the WSJ, the US economy may accelerate by 6.9% this year. This will be the most significant increase since 1983, when the national GDP increased by 7.9%.

Meanwhile, on the other side of the Atlantic, the balance of risks for the economic outlook is still shifted to the negative side. At least, this is what the ECB leadership believes.

This week, investors are waiting for the regulator's verdict on monetary policy and tips on further plans to support the economy against the backdrop of the ongoing pandemic.

The breakdown of 1.1800 for EUR/USD down does not look confident yet.

The euro may gain support if the ECB does not meet market expectations regarding a "dovish" change in interest rate forecasts at a meeting on Thursday. But if this is done, it will open the way to further weakening of the single currency.

"This means that the ECB's monetary policy will remain super-soft for a longer time, which is an obstacle for the euro," Commonwealth Bank of Australia strategists said.

In this scenario, the fight of the "bulls" for EUR/USD over the 1.1800 mark may be lost this week. As a result, the chances of testing the annual low at the level of 1,1704 and further immersion to the 16th figure will increase. The reverse situation will lead to a rebound of the pair and a return to recent highs near 1.1900.

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

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