The U.S. dollar index is showing a downward trend today after yesterday's unexpected surge to 102.4. The dollar bulls didn't hold on the taken height and today are actively losing their positions. This fact was reflected accordingly in the dynamics of the major dollar pairs. EUR/USD, in particular, updated the weekly low yesterday to 1.0830, whereas today, it is higher than the target of 1.0900. If we abstract away from the intraday price fluctuations and look at the weekly chart of EUR/USD, we can see that the pair is actually stuck in place, trading in a 100-point price range of 1.0850–1.0950.
But the situation may soon change drastically: on Wednesday, U.S. inflation growth data for March will be released. There is no doubt that this release will provoke strong turbulence in the EUR/USD pair. Whether in favor of the dollar or against it is an open question.
Increased interest in risk
Yesterday, the U.S. currency strengthened quite sharply across the market on the back of an almost empty economic calendar. The catalyst of the greenback growth was Taiwan, around which political battles unfolded again. This time the degree of tension got noticeably higher: China simulated missile attacks on the island during military exercises, and the USA admitted sending the U.S. military to Taiwan "in case of China's invasion." It should be emphasized here that this "option" was allowed not by any of the second-rate politicians or former officials, but by the current head of the House Foreign Affairs Committee Chairman Michael McCaul.
This news flow raised the level of anti-risk sentiment in the markets. The beneficiary of this situation was the greenback, which was in high demand yesterday as a defensive asset.
But, as a rule, such fundamental factors have a short shelf life, especially if the situation does not worsen in an upward spiral (for example, as it was with the coronavirus pandemic in 2020). Therefore, today, the dollar was forced to retreat from its positions: China completed military exercises, and none of the top American politicians picked up the belligerent rhetoric of the aforementioned McCaul. The degree of tension has decreased, due to which the market has increased interest in risky assets.
And since yesterday's slump in the EUR/USD price was due entirely to the strengthening of the greenback, today, this spring was unleashed in the opposite direction, allowing the buyers of the pair to enter the area of the 9th figure again. Notably, traders virtually ignored today's release of Chinese inflation growth data. According to the released data, the consumer price index in China in March came out at 0.7%, with the forecast of growth to 1.0%. The downward trend was recorded for the second month in a row after three months of consecutive increases. EUR/USD traders ignored this report, focusing on European releases.
Longs are attractive but dangerous
The Euro Stoxx 50 index went up today (+0.5%) after a 4-day Easter break, reflecting the improving market sentiment and increased interest in risky assets. Additional support to the euro was provided by the macroeconomic reports published during the European trading session. In particular, the retail sales volume in the European region decreased by 3.0% in February, while most experts forecasted a more considerable decline by 3.5%. Another indicator—Sentix investor confidence indicator—was also in the green zone, showing positive dynamics for the sixth month in a row (in April it was at -8.7 while the forecast was -11.7). On the one hand, these secondary reports came out "in the negative," reflecting the difficult economic situation persisting in Europe. On the other hand, traders paid attention to "green color" of the releases. This factor complemented the positive (for Euro) fundamental picture.
However, today's EUR/USD price pullback should be treated with great caution. Buyers have only regained lost positions, while it is too early to talk about the resumption of the upward trend. On the eve of tomorrow's inflation report, traders are unlikely to decide to open large trading positions, including towards up.
According to preliminary forecasts, the overall U.S. consumer price index will fall to 5.2% (after February's decline to 6.0%). But the core index, excluding food and energy prices, could show an upward trend, rising to 5.6%. If both components come out in the red, the dollar will be under pressure as the market will again question the Fed's resolve on a rate hike in May. The probability of a 25-point hike is currently estimated at 67%, according to the CME FedWatch Tool.
Conclusions
The dollar reacted to the rising risk sentiment yesterday by strengthening its position across the market. Today, the interest to risky assets increased again, which made the greenback "out of business." Buyers of EUR/USD pair regained the lost points, and they marked within the limits of the 9th figure.
But this circumstance does not indicate the priority of longs. Before the publication of tomorrow's report on the growth of the U.S. CPI, it is advisable to take a wait-and-see position since, in the case of an "inflationary surprise," the dollar may temporarily (but significantly) strengthen, putting pressure on EUR/USD. Therefore, it is safer to be out of the market before the release of inflation data.
Trading analysis offered by RobotFX and Flex EA.
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