The euro-dollar pair sharply dropped this morning, losing almost 150 points in a few hours. But the price slowed its fall in the middle of the 13th figure: the initial euphoria from Donald Trump's speech faded, while the news background regarding the dynamics of the spread of the coronavirus continues to instill fear in investors.
Let me remind you that the dollar strengthened throughout the market thanks to the speech of the US President, who promised to support the country's economy. According to him, the White House is now preparing a package of measures to combat the negative impact of the consequences of the coronavirus epidemic on the US economy. The announced measures will affect, in particular, income tax and loans for small businesses. Trump told reporters that a possible payroll tax cut or "very substantial" tax relief will be discussed at an upcoming meeting with congressional Republicans.
Dollar bulls were enthusiastic about this news, which became a kind of "spoon of honey in a barrel of tar". After a series of negative infopods for the US currency, the White House's intentions were able to provide significant support to the greenback. At the same time, the bears of the EUR/USD pair were not able to develop success – after reaching the local low of 1.1330, the pair stopped its fall and started marking time, even showing attempts to grow. Looking ahead, it should be noted that the pair can still go down to the area of the 12th figure and even test the nearest support level of 1.1190 (the Tenkan-sen line on the daily chart) - especially if the White House's intentions are confirmed, and the ECB announces a monetary policy easing the day after tomorrow.
But sales look very risky at the moment. First, there was information on the market that Trump hastened to announce such large-scale changes. According to the US press (in particular, CNBC), the White House is not yet ready to offer Congress an incentive program that would limit the negative impact of the coronavirus. So, according to unnamed sources, the statement of the American leader caught economic advisers and administration officials by surprise, since there is no formed program yet, and the corresponding ideas are under discussion.
Secondly, at the moment, any more or less loud statement by Trump must be viewed through the prism of the upcoming presidential election. The "convenient opponent" in the form of Democrat Sanders continues to lose points – according to the latest polls, Biden is ahead of him by 16%. With a high probability, we can assume that he will become the winner of the primaries. Therefore, the current head of the White House, who is already famous for his populism, could not help but use the situation with the coronavirus in his favor. But the de facto "exit" result may be more modest than market expectations. Especially since Trump only announced consultations with Congress, and not specific economic measures. By the way, House speaker Nancy Pelosi and Senate minority leader Chuck Schumer have already told reporters that any payroll tax cut should only be taken against those affected by the virus. While the head of the White House announced a general tax relief.
In other words, the market began to doubt that the Trump administration will take large-scale and, accordingly, effective steps to counter the negative impact of the coronavirus. In any case, today all attention will be focused on the announced press conference of the US President. If the market is disappointed with the proposed measures, the dollar will collapse again "on all fronts".
Meanwhile, the Federal Reserve is preparing to further reduce the interest rate – at least, almost all experts and currency strategists are sure of this. The market is only arguing about how aggressive the actions of the US regulator will be. According to some analysts, the Fed will limit the rate cut to 25 points in March, while others allow a reduction of 50 or even 75 points. By the way, today Trump once again criticized the Fed, calling the central bank a "pathetic, slow moving Federal Reserve, headed by Jay Powell". He called on the central bank to immediately reduce the base interest rate "to the level of competing countries."
Thus, Trump's bellicose rhetoric may provide temporary support for the US currency – the Fed's dovish intentions will in any case put background pressure on the greenback. If the previously announced measures are called into question (for example, Trump will accuse the congressmen of "intransigence"), the EUR/USD pair will quickly return to its previous positions.
The decline in US inflation may also put additional pressure on the dollar. The preliminary data for February will be released tomorrow. According to forecasts, the overall consumer price index will show a negative trend: on a monthly basis, it will slow to zero, and to 2.2% on an annual basis. Core inflation should come out at the level of January - both in monthly and annual terms. If the indicators come out at the expected level, the dollar is unlikely to react to the release. However, any deviation from the forecast values can raise the volatility of the pair.
The material has been provided by InstaForex Company - www.instaforex.com