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27.02.202114:43 Forex Analysis & Reviews: EUR/USD. Geopolitics and Treasury Yield growth: Greenback's bubble may burst soon

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The euro-dollar pair did not stay in the support level of 1.2080 at the end of last week, ending the five-day trading session at 1.2073. The massive strengthening of the dollar took place in two stages - first, the market reacted to an air strike by the US Air Force on targets in Syria, then the dollar bulls received indirect support from US intelligence, whose representatives directly accused the Crown Prince of Saudi Arabia of organizing the assassination of opposition journalist Khashoggi. Such resonant events of a geopolitical nature could not help but affect the mood of investors. The demand for the safe dollar has sharply increased, especially against the backdrop of a sharp rise in Treasury yields - for example, the yield on 10-year bonds on Friday jumped to 1.530% (the highest value since January 2020).

Exchange Rates 27.02.2021 analysis

Take note that the fundamental factors of a geopolitical nature must be treated with a certain degree of caution, if only because the term of their "action" is very limited. Treasury yields growth is also based on rather shaky arguments, conditioned by market expectations, and not factual. We have seen such impulsive jumps from the dollar more than once - but in each case, dollar bulls retreated, not finding support from the members of the Federal Reserve or key macroeconomic reports. In my opinion, "reinforced concrete" fundamental factors are needed for a large-scale dollar rally, while the current situation resembles the erection of a castle on the sand.

Let's start with geopolitics. As you know, on Thursday, the US Air Force launched an airstrike in eastern Syria on the infrastructure of the Syrian armed groups supported by Iran (at least, this is how the Pentagon argued for these actions). After that, US President Joe Biden issued a statement in which he warned Tehran that it cannot "act with impunity on the world stage." The airstrike, which according to various estimates killed from 17 to 27 people, was a response to repeated attacks by militants on US military personnel and representatives of the international coalition in Iraq. Given the previous events related to the murder of a high-ranking Iranian general by the Americans, as well as given the general tension between the United States and Iran, many were interested in Tehran's response. Just a year ago, the world press often heard the idea that countries were "sliding towards a big war". However, this time the reaction of the Iranian authorities was restrained. Iran called the airstrikes a "violation of international law" and a "violation of the sovereignty and territorial integrity of Syria." A similar statement was made by the head of the Syrian Ministry of Foreign Affairs. In fact, this situation can be considered exhausted – at least in the context of discussing possible retaliatory actions on the part of Tehran or Damascus.

That is why the dollar stopped rising Friday afternoon (and the EUR/USD pair recovered to 1.2140): exactly until the moment when the US National Intelligence published a report on the role of the Saudi Arabian government in the assassination of opposition journalist Jamal Khashoggi. US intelligence officers directly accused Crown Prince Mohammed bin Salman of organizing this murder, which, I recall, was committed on the territory of the Saudi embassy in Turkey. In response to the report, the US Treasury and State Department imposed sanctions against dozens of Saudi officials, as well as against the rapid reaction forces, who are responsible for protecting Muhammad bin Salman.

I think it is not worth mentioning here once again that Saudi Arabia is the co-leader of the Coalition against the terrorist organization ISIS (banned on the territory of the Russian Federation) and an important partner of the United States on the Arabian Peninsula. Therefore, such a sharp attack by Washington against the de facto leader of this country has worried not only many politicians, but also participants in the foreign exchange market. The demand for the safe dollar increased again, due to which the EUR/USD bears impulsively pushed through the support level of 1.2080 (the middle line of the BB indicator, coinciding with the Kijun-sen line on the daily chart).

Exchange Rates 27.02.2021 analysis

However, in this situation, there is also a reverse side of the coin. So, according to CNN, Biden, despite the bellicose rhetoric against Riyadh, does not intend to apply sanctions against Crown Prince Mohammed bin Salman. Sources of journalists in the White House pointed to the difficulties that may emerge in the event of a break in relations with a "problematic, but still an ally" in an unstable region. Of course, this information is unofficial. But at the same time, it should be noted that in the public plane, Biden did not directly announce sanctions against the leadership of Saudi Arabia. He only noted that during a telephone conversation with the king of the country, he warned him of "appropriate responsibility". In other words, this fundamental factor can also have a short-term impact on the market (and, above all, on the US dollar).

As for the growth of the yield of Treasuries, the situation resembles a soap bubble. Among the main reasons for the dynamics are the general confidence of investors that the Fed members will abandon the ultra-soft monetary policy ahead of time, despite their own statements that they do not intend to do so. The situation itself looks somewhat absurd, since key macroeconomic reports (for example, Nonfarm or inflation) have recently disappointed market participants, and the rhetoric of the Fed members was dovish in nature. In particular, Fed Chairman Jerome Powell admitted that the US economy is at the very beginning of the "rehabilitation path", and it will take a long time for the country to recover to the target levels for inflation and employment. At the same time, he admitted that the US central bank can use all available levers of influence, using "the entire arsenal of monetary policy tools." A similar position was voiced by Powell's colleague, Board of Governors member Lael Brainard. At the same time, Fed members take into account the fact that there is a vaccination campaign in the country, and Congress should approve a large-scale package of additional assistance to the US economy in the spring. And at the same time, members of the US central bank insist that the "presence" of the Fed will be needed, including when the US economy shows signs of growth.

Exchange Rates 27.02.2021 analysis

Thus, in my opinion, the dollar's appreciation is temporary. If geopolitics does not come to the rescue of dollar bulls again, the EUR/USD pair will resume its growth in the medium term. The current decline can be used to open long positions, with the first target at 1.2130 (Tenkan-sen line on the daily chart). The main target (resistance level) is located slightly higher - at around 1.2200 (the upper border of the Kumo cloud on the same timeframe).

Irina Manzenko
Analytical expert of InstaForex
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