The US currency is under strong pressure from a negative fundamental background. The dollar index tested an annual maximum in the region of 98 points on Friday. But today, it is just as confidently heading towards the base of the 97th figure. To some extent, the weakness of the greenback is reflected in the dynamics of all dollar pairs, including EUR/USD. Buyers "starve out" take the 12th figure, although each item is given to them with great difficulty. Nevertheless, bulls of the pair were able to push the price away from the key support level of 1.1105, protecting themselves from falling into the area of the 10th figure.
By and large, the price of the pair returns to the usual "flat" range of 1.1210-1.1340, within which it has fluctuated throughout most of May. On the other hand, the market is now too wound up and subject to strong price fluctuations. Therefore, eur / usd is unlikely to hang in the specified corridor. The events of Tuesday in this context will play an important role: first, we will learn data on the growth of European inflation, and secondly, we will listen to Fed Chairman Jerome Powell, who will speak at the economic conference organized by the Chicago Fed.
It is worth noting that at the end of last week, the dollar was falling due to general panic in the market. The protracted trade conflict with China, the new duties on Mexico, and now, the White House's claims on India make American investors nervous. For the first time in a long time, the dollar was not used by the market as a defensive asset: the dynamics of the debt market dragged greenback behind them, reducing the attractiveness of the American currency.
Today, the concern of traders has become more "tangible" form. The market has been actively discussed rumors that the Fed will reduce the interest rate in the near future. The probability of a rate cut at the July meeting increased to 55%, whereas a week ago it was no more than 15-18%. Moreover, some analysts are confident that the Fed will not stop at what has been achieved, and will return to this issue again by the end of the year. By some estimates, this scenario is implemented with a probability of 70%. Today's macroeconomic reports, which came from the USA, also added fuel to the fire. In particular, the production ISM fell to a mark of 52.1 points - this is the weakest indicator growth rate since October 2016 (according to forecasts, it should have risen to 53 points). Here, it is worth considering that it does not take into account the fact of the introduction of duties on imports from Mexico. Thus, the figure may show a weaker trend next month, unless Mexico City and Washington come to a compromise.
However, the conflict with Mexico in this case plays a secondary role: the focus of attention is the trade war with China, which is heating up with a new force. In particular, the Chinese authorities are now conducting an investigation into the largest US postal company in the world, FedEx. The initiator of the investigation was the notorious Huawei, which accused Americans of violating the rules of the industry. Chinese journalists have learned the essence of the claims: FedEx allegedly sent two parcels of important commercial documents from Japan to Shanghai through the United States. Similar actions by the American postmen were allegedly taken in respect of two more shipments from Vietnam to Huawei offices in Hong Kong and Singapore. If the official Beijing confirms Huawei charges, the largest postal company in the world will get to the People's Republic of China on the "black list" of unreliable organizations. This incident once again confirms the fact that the trade war is still gaining momentum, and the parties are far from constructive dialogue. The situations with Huawei and FedEx only complement the overall fundamental picture, while the strongest steps on the part of China (in particular, in restricting or banning the export of rare earth metals) are still ahead.
Thus, the US trade conflicts are now "played with new colors" in the eyes of investors: an increase in geopolitical tensions is associated with an increase in the likelihood of the Fed lowering interest rates. And if Jerome Powell on Tuesday at least indirectly confirms such intentions, the dollar will strengthen its fall.
But the single currency on Tuesday may receive support from European inflation. According to the general forecast, the consumer price index in the eurozone in May will weaken to 1.4% (from the previous value of 1.7%). Core inflation should also show a negative trend, returning to the 1% mark after rising in April to 1.3%. But, according to a number of currency strategists, inflation may still be a surprise, being better than pessimistic expectations. At the same time, they refer to the dynamics of the oil market (in April) and consumer activity in the key countries of the eurozone. If inflation data turns out to be in the "green zone" tomorrow, the euro will receive substantial support, especially in contrast to American problems.
In terms of technology, bulls of the EUR/USD pair need to overcome at least the mark of 1.1240 (the upper line of the Bollinger Bands indicator on the daily chart, which is in the Kumo cloud) to confirm the strength of the northern movement. When overcoming the mark of 1.1280 (the upper boundary of the Kumo cloud on the same timeframe), the Ichimoku trend indicator will form a bull signal "Parade of lines", opening the way to the area of the 13th figure. It is not yet advisable to speak of further heights, given the impulsive growth pattern of the EUR/USD.
The material has been provided by InstaForex Company - www.instaforex.com