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#1 09-02-2021 13:26:37

johnedward
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From: Paris - France
Registered: 21-12-2009
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EUR/USD: a test of the moving average line is underway

EUR/USD: a test of the moving average line is underway


One of the main lessons of the past year is that the falling dollar has helped the world fight the virus situation. Indeed, this was the case, especially after the Fed in the United States opened USD swap lines with other major central banks around the world.

Towards the end of 2020, all the world's major investment banks predicted a rise in equity markets due to the falling dollar this year. Various arguments have been put forward to justify the so-called reflationary trade, all of which are valid.

If one moves forward quickly by one month into the new trading year, the dollar is stronger, not weaker. The EUR/USD pair is struggling to hold at 1.20 after trading above 1.2329 at the beginning of 2021. This represents a drop of more than "three big numbers" in less than a month, as traders like to say.
Fed not as aggressive as it seems

The starting point for understanding the dollar's rise is the Fed's balance sheet. While the Fed has indeed expanded its balance sheet in 2020 by re-engaging in quantitative easing, other central banks have been more aggressive.

For example, the Swiss National Bank (SNB) has a balance sheet of 140% of its gross domestic product (GDP). The same applies to the Bank of Japan (BOJ). Even the balance sheet of the European Central Bank (ECB) has expanded to almost 100% of the eurozone's GDP and is still growing. What about the Fed? The expansion of the Fed's balance sheet barely reached nearly 60%, which explains, although partially, the strengthening of the dollar at the beginning of the year. In other words, other central banks have relaxed more than the Fed. This therefore favours a stronger dollar.

Another element to take into account is the new US Treasury Secretary, Janet Yellen. When she headed the Fed a few years ago, she was hawkish about the role of the dollar in the international financial system.

Just after she took over as head of the Treasury, the market learned this week that the Treasury Department was massively reducing its issuance plans in the first quarter of the year. The goal is to reduce the Treasury's general account balances by more than two-thirds. This will have the side effect of increasing the reserves of the banking system and the initial effect should be dovish for the greenback.

However, on closer inspection, by cutting emissions, the Fed will not have enough to buy to continue to grow the balance sheet at a faster pace than its rivals. Therefore, a stronger dollar makes sense.

If we don't see any change in recent trends, the danger is that the dollar rally will intensify as the market is positioned on the other side.

The Euro continued its rebound against the Dollar, testing the 20-day moving average of the spot this morning, against a backdrop of confidence in the ability of the U.S. Congress to adopt a stimulus package close to the $2 trillion target announced by Joe Biden. And this is especially in view of the latest monthly federal figures, which are mixed on American employment. "These 'bad' figures reinforce Biden's desire to have his $2 trillion plan to support economic activity voted through quickly, without necessarily seeking a consensus with the Republicans. The enthusiasm of investors was also fuelled by the adoption by the House of Representatives of a resolution intended to facilitate the approval of the plan," according to a BCG analyst. However, "the vote could wait until next month because the Senate is currently busy with Trump's trial," says Vincent Boy, market analyst at IG France.

Traders will have taken care to dissect the interview given by Christine Lagarde to the Journal du Dimanche. An interview which, according to CM-CIC Market Solutions "confirms the feeling that the monetary support of the ECB is well calibrated".

As of right now, the pair is trading at $1.2099.

KEY CHART ELEMENTS
A rebalancing of forces in the very short term is taking place on the pair, whose profile remains bearish below the 20-day moving average (in dark blue). The testing of this short-term trend line is ongoing. Forex traders should avoid taking immediate positions until a more interesting chart entry point is found.

MEDIUM TERM FORECAST
In view of the key chart factors we have mentioned, our opinion is neutral in the medium term on the Euro Dollar (EUR/USD) exchange rate. We will maintain this neutral view as long as price remains positioned between support at $1.2070 and resistance at $1.2210.

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