The euro came under significant pressure on Wednesday following the dovish comments of the European Central Bank Governing Council member Klaas Knot and a similar publication by Bloomberg. In particular, Knot criticized the overvalued euro exchange rate and hinted at a possible reduction in the deposit rate. Such rhetoric extinguished the growth momentum for the EUR/USD pair, afterwards the price returned to the area of the 20th figure. And yet, despite the unexpectedly darkened fundamental background for the single currency, you should not rush to open short positions on the pair.
The market reacted too emotionally to the "verbal attack" from the ECB representatives. The attack was indeed unexpected in light of the central bank's January meeting just last week. ECB President Christine Lagarde abstracted from the topic of rate cuts, while the issue of the exchange rate of the single currency was touched upon in passing: Lagarde only voiced the standard phrase that the central bank will monitor the euro exchange rate.
Against the background of a rather "peace-loving" and generally passing ECB meeting (which, I repeat, took place just a few days ago), Knot's statement sounded like a bolt from the blue. Actually, thanks to the notorious effect of surprise, the single currency sank throughout the market, while there is really no good reason to change the trend. The market's reaction to the rhetoric voiced today is speculative.
In addition, in anticipation of the announcement of the results of the January Federal Reserve meeting, many market participants are taking profits, thereby provoking increased volatility. The dollar index once again rebounded off local lows and headed up, reflecting the increased interest of traders. The greenback is in demand again amid rumors that Fed Chairman Jerome Powell will positively assess recent events in the United States (Biden's victory, 2 trillion aid package and the start of mass vaccinations), hinting at the early phasing out of stimulus programs later this year. And although, in my opinion, this scenario looks unlikely (Powell himself recently denied such rumors), traders are now following the "common impulse" buying up the dollar. In other words, the EUR/USD pair is now in the area of price turbulence, but this does not mean that the price is plunging down irrevocably.
First of all, let's look at the ECB's intentions. It is worth recalling here that in September last year, as soon as the pair touched the 1.20 mark, the ECB also became concerned about this fact. In particular, the chief economist of the ECB, Philip Lane, said that the euro is "unacceptable for the central bank." Such rhetoric then also alarmed traders: rumors spread around the market that the regulator would conduct a currency intervention to devalue the euro. As a result, the pair dropped to the 17th, and then to the 16th figure. But in the end, the rumors of a dovish nature did not come true, afterwards the pair not only overcame the 20th figure, but also grew by another 300 points.
Apparently, the ECB also demonstrated a similar maneuver on Wednesday. Only now, for a similar market reaction, the central bank had to directly "scare" the market – this time not by currency intervention, but by lowering rates. In this context, it is impossible not to recall the agency Bloomberg, whose journalists spread similar information in essence. So, citing unnamed, but "knowledgeable" sources, Bloomberg reported that currency market traders "underestimate the chances of a rate cut." Allegedly, many representatives of the ECB consider additional stimulation of the economy through rate cuts as a "viable option".
Thus, the euro was hit by a double blow today. The head of the central bank of the Netherlands Klaas Knot (who, by the way, is a consistent dove) weakened the euro, while Bloomberg's information finally knocked down the positions of EUR/USD buyers.
But let's remember Lagarde's rhetoric and the minutes of the December meeting of the ECB - neither this month, nor in the past, the members of the central bank did not discuss the possibility of lowering the rate on deposits. Following the January meeting of the ECB, Lagarde announced that the December forecast for the current year "is still valid." In this context, she also noted that the incoming data "confirms the previous baseline scenario of the ECB." In other words, the ECB kept the parameters of monetary policy in the same form and did not revise its forecasts, even despite the protracted lockdowns in the key countries of the European Union. Given these circumstances, today's statements by Knot and Bloomberg's source look somewhat strange and speculative.
Take note that such fundamental factors have a short-term impact on investor sentiment. Therefore, the current downward momentum of EUR/USD should be treated with great caution. Such arguments are unable to break the growth trend. This will happen if the rest of the ECB (and above all Lagarde) "pick up" the idea of reducing the rate and will relay it in the media.
As for the strengthening of the US currency, it is also impossible to talk about a dollar rally. In my opinion, the rumors about the early curtailment of the Fed's stimulus programs are groundless. Just two weeks ago, in one of his speeches, Powell said that the US economy is still far from the Fed's target for inflation and employment, so it is too early to discuss a change in monthly bond purchases.
All this suggests that the current decline in the price of EUR/USD can be used as an excuse to open long positions (if we consider medium-and long-term trading). Making trade decisions after Powell's press conference looks more reliable, in my opinion. The first target of the growth movement is the 1.2200 mark – this is the average line of the Bollinger Bands indicator on the daily chart, which coincides with the Kijun-sen line. The main target of the growth movement is located much higher (1.2330 is the upper line of the Bollinger Bands on the same timeframe). But it is too early to talk about this high - first of all, buyers of EUR/USD need to gain a foothold in the area of the 22nd figure. The support level is 1.1950 - this is the lower limit of the Kumo cloud on D1 – you can place the stop-loss here.
The material has been provided by InstaForex Company - www.instaforex.com