28.02.202014:40 Forex Analysis & Reviews: The dollar returned to the red line

In 2020, traders working with EUR/USD are thrown into heat and cold. The pair falls to the lowest levels since the spring of 2017 and then recoups most of the losses within a few days. Curiously, in both cases, it was not without disappointment. The collapse of the euro in the first month and a half was associated with lost illusions about its growth to $1.16 by the end of the year. The rise of the single European currency at the end of February - with the mass closing of positions on risky assets.

Let's go back to the beginning of 2020. Investors are preparing for the signing of a phase 1 trade agreement between the US and China and are seriously counting on the ceasefire to help restore the European and global economies. If we add to this the potential slowdown in US GDP due to Boeing's problems, then the narrowing of divergence in economic growth in the US and the eurozone is a strong argument in favor of buying EUR/USD. Of course, this is not the end of investment ideas. Accelerating global GDP, low borrowing rates, and volatility are creating a Goldilocks regime for developing countries' monetary units. Ideal conditions for the carry trade. Players on the difference start looking for the best funding currencies. And they find them in Japan and Germany, where debt rates are negative.

Until the S&P 500 rewrote historical highs, everything was going well. However, the fastest 10% correction of the stock index in history forced carry traders to sell the Mexican peso, Russian ruble, Indian rupee, and other EM monetary units and return to the euro and yen. The difference game has stopped working, especially as BofA Merrill has spooked investors by lowering global GDP forecasts to the lowest level since the global financial crisis.

Dynamics of global GDP

10% correction of the US stock market

The main factors of the EUR/USD spike in January and the first half of February were the divergence in economic growth in the US and the eurozone, the inflow of foreign capital to the US equity market, the higher yield of treasuries compared to foreign counterparts, and the use of the euro as a funding currency. At the end of the winter, the S&P 500 corrections turned everything upside down.

The report of the US health system about the transmission of coronavirus from person to person in the United States, control of thousands of potentially infected in California makes it doubtful that the American economy will remain resistant to the epidemic. The US stock market is facing a serious outflow of capital, funding currencies, including due to the growth of the euro volatility to annual peaks in favor, and the high rates of the US debt market play against the dollar. Investors believe that the Fed has more options to reduce the rate by 75 bps than the ECB - by 10 bps.

Technically, the daily EUR/USD chart has a transformation of the "Shark" pattern to 5-0. If the "bears" manage to keep the pair's quotes below 1.1 (50% of the wave from the "Shark" model) and storm the support at 1.098, the risks of the euro falling to 1.095 and 1.0885 will increase. On the contrary, if the bulls regain control of 1.1, the road north to 1.1065 and 1.114 will be opened.

EUR/USD, the daily chart