20.08.202009:57 Forex Analysis & Reviews: EUR/USD. "Rose-tinted glasses" of dollar bulls: greenback in correction mode

The US currency undergoes correction: following a decline to multi-month lows, or to be more precise, to the lows of the spring of 2018, the dollar index turned around and rose to the 93.03 level. Such a price surge is rather technical amid a half-empty economic calendar, although there were certain fundamental reasons for strengthening the greenback yesterday. In addition, the dollar positively reacted to the minutes of the last Federal Reserve meeting, which actually turned out to be very contradictory.

However, the corrective growth of the US currency began a few hours before the minutes. By and large, the dollar had already reached its local price low, and growing further was questionable. The dollar index slowed its decline, and key dollar pairs began to show a flat. A correction was clearly brewing in the market – only a formal reason of a fundamental nature was needed to start it.

White House Chief of Staff Mark Meadows said that informal negotiations with the Democrats on the adoption of a new stimulus package are still ongoing - "and have gone extremely well". It is worth noting here that literally the day before yesterday, the head of the group of economic advisers to the presidential administration reported that US President Donald Trump insists on accepting the original version of the bill and did not agree to compromise with the Democrats, who proposed increasing the amount of aid to two trillion dollars. Against the background of such a categorical position, dollar bulls were pleasantly surprised by the news that the negotiation process de facto is continuing (ongoing and behind the scenes). Thus, the greenback received a good reason for its correction.

The minutes of the July Fed meeting published a little later only strengthened the dollar's position, although in fact the rhetoric of this document was contradictory. But at that time, traders were inclined to only see the positive aspects of the minutes, while ignoring the pessimistic theses. In any case, the document is clearly outdated (the meeting was held three weeks ago, at the end of July), so its messages are also outdated. However, it was published at a good time for dollar bulls, during a period of corrective gains. Therefore, it made a contribution, even despite all the ambiguity.

So, the Fed members indicated the need for additional measures to help the US economy at their last meeting – and primarily of a fiscal nature. At that time, talks between Republicans and Democrats were in full swing and the parties even showed optimism about their possible results. In addition, according to the minutes, the topic of negative rates was not raised during the meeting, and the issue of controlling the yield curve was discussed, but was eventually put on hold.

The list of positive points that the minutes provided for the dollar was limited. At the same time, market participants ignored the alarm signals. For example, returning to the issue of controlling the yield curve. This issue was left open by the members of the dental bank– according to the Fed members, they can return to it if "circumstances change significantly". At the same time, we do not know what criteria the Fed members use in assessing the situation, for example, in September. Therefore, this fundamental factor can not be attributed to the positive category.

In addition, members of the central bank are very pessimistic about the prospects for the recovery of the US economy in the second half of the year. In particular, they noted that real consumer spending "remains very low", and recent indicators of spending on many consumer services (restaurants, hotels and air travel) "show low consumer activity".

Therefore, the minutes of the July Fed meeting cannot be called hawkish: the dollar bulls only saw what they wanted to see in it during the greenback's period of correctional growth. But the influence of this fundamental factor in any case will come to naught today.

Now a few words about the long-suffering bill, which has been under discussion in Congress for almost a month. The recent statement from Meadows about continuing talks with the Democrats caused a stir in the market. But, as it turned out later, Republicans are tipping the Democratic party to support a reduced version of the economic assistance bill. It includes incentive checks for certain categories of Americans, as well as funding for social security and the school system. The fact is that the Speaker of the House of Representatives, Nancy Pelosi, is calling congressmen for a Saturday vote on the Postal Service bill. In this regard, Meadows suggested a vote for a reduced bill on new incentives. But Democratic leaders have already rejected the call for a limited bill – they are pushing for "legislation of a more extensive nature."

To sum up, it should be noted that the dollar has received a temporary respite, but the fundamental background for it has not dramatically changed: Democrats and Republicans are still at different poles regarding fiscal incentives, Trump is still fuelling anti-Chinese rhetoric, and his rating is still growing. Therefore, after the correction is completed, the greenback will again be under background pressure.

If we talk about the EUR/USD pair, then bears can push the price to the bottom of the 18th figure (the average line of the Bollinger Bands indicator on the daily chart). You can wait for the correction to be completed, but you can also consider longs to the resistance level of 1.1940 from the current positions (the upper line of the Bollinger Bands on the same timeframe). This target turned out to be a hard nut, so it is too early to talk about higher price levels.