18.01.201902:19 Forex Analysis & Reviews: EUR/USD: weak euro, weak dollar

EUR/USD descends slowly, although the single currency, and the greenback are under a certain pressure. On the one hand, the slowdown in the eurozone, dovish comments from the European Central Bank and the uncertainty of Brexit, on the other hand, a record shutdown, a slowdown in U.S. inflation and a slowdown in the rise in interest rates. Bears of the EUR/USD remain dominant in this confrontation, but their superiority can be called conditional – they do not have sufficient arguments for the development of a large-scale downward trend.

In general, the price "backlash" allows the pair to fall at least to the level of 1,1365 (the lower limit of the Kumo cloud on D1) and 1,1320 (the lower line of the Bollinger Bands indicator on the same timeframe). But bears of EUR/USD are in no hurry to go to the target levels, and the downwards momentum is gradually losing its strength. Although until recently there were all the prerequisites for testing the 12th figure, especially after Mario Draghi's "dovish" comments.

Speaking in the European Parliament, the ECB head was no longer as optimistic as he was back at the December meeting. He acknowledged that the eurozone economy is slowing down at a more substantial pace than previously expected, and that the most important thing is that this trend will continue "for a long time". Such words against the background of many months of decreasing inflation and industrial production had a negative impact on traders of the EUR/USD: first, the price could not remain within the framework of the 15th figure, then plummeted to the level of 1,1380. After all, Draghi's estimated position suggests that the ECB is unlikely to raise the rate within the current year, although the basic scenario assumes one increase in autumn or winter. But if the economic situation in the eurozone does not change radically, the approximate date of the first increase will have to be postponed to the first half of 2020.

It is worth recalling that in October, Mario Draghi will leave his post, and the "hawk" Jens Weidmann is unlikely to take his place (although he used to be the main candidate for this position). As it became known at the end of last year, German Chancellor Angela Merkel would like to see her protege as the head of the European Commission and for this she can "exchange" the position of head of the ECB. After Weidmann actually fizzled out, the most likely candidate for this post was Erkki Liikanen, the head of the Central Bank of Finland, who is known for his cautious position.

Thus, representatives of the European regulator noticeably soften their rhetoric, putting pressure on the single currency. A new wave of conflict between Rome and the ECB only complements the negative fundamental picture against the background of uncertain prospects Brexit.

Despite this "bunch" of downward factors, bears of the EUR/USD could not even reach the strongest support levels to mark their priority. The US dollar is also under the yoke of problems, among which there are several major ones. First, the US Federal Reserve, as well as the ECB, substantially softens its rhetoric.

At the beginning of January, three Fed representatives, Charles Evans, Erik Rosengren and James Bullard, all spoke (all with voting rights this year). Two of them (Evans and Rosengren) had previously taken a rather "hawkish" position, but now they have changed their point of view, reflecting general trends. And although they are still in favor of raising the rate, officials have announced a list of risks that threaten US economic growth. As a result, each of them came to an unequivocal conclusion: there is no need to hurry with tightening of monetary policy this year. In turn, Bullard stated that the stakes are now at an acceptable level, so a further increase is inappropriate.

Also, the US dollar was under pressure due to the publication of strong corporate reports (primarily in the banking sector), due to which the stock market came to life. In particular, Bank of America and Goldman Sachs showed the strongest gains. Their performance for the fourth quarter of last year turned out to be stronger than the forecasts of most analysts.

Indirectly, the situation with the American currency was also affected by the situation with Brexit. Contrary to the expectations of many experts, the failed vote did not turn out to be a disaster. Markets laid such a possibility in current prices, so the very fact of disapproval of the transaction was perceived by traders calmly. Moreover, subsequent events made it possible to speak about a high probability of a "soft" Brexit.

Firstly, the British Parliament expressed confidence in the May government (Laborites were completely defeated here), and secondly, the prime minister promised to listen to the "wishes" of parliamentary factions in order to coordinate with the EU the option of the deputies. And although these intentions may not be realized, there is a fallback option - postponing Brexit. In other words, the likelihood of Britain's chaotic exit from the EU has significantly decreased, and this fact puts indirect pressure on the greenback due to the lack of panic in the market (and, accordingly, increased demand for the dollar).

Summing up, it should be noted that the pair is stuck in a flat, which is caused only by negative fundamental factors - both from the dollar and from the euro. In my opinion, the situation may turn in favor of the single currency - if London and Brussels find common ground on the draft transaction. Otherwise, the pair will continue to crawl to the level of 1.1365 (lower Kumo cloud boundary on D1) and 1.1320 (the bottom line of the Bollinger Bands indicator on the same timeframe), followed by an attempt to test the 12th figure. The nearest resistance levels are at 1.1420 and 1.1470 (the upper boundary of the Kumo cloud and the Tenkan-sen line, respectively). If the price of EUR/USD overcomes these barriers, then the next target will be the price of 1.1520 - the upper line of the Bollinger Bands indicator, the breakthrough of which will open the way to the 16th figure.