01.09.202022:12 Forex Analysis & Reviews: EUR/USD. Assault on the 20th figure

The euro-dollar pair last traded in the area of 20 figures more than two years ago – in the early spring of 2018. Therefore, it is not surprising that EUR/USD buyers failed to overcome the psychologically important resistance level of 1.2000 the first time. As soon as the pair entered this price area, it immediately attracted sellers. At the same time, buyers began to take profits en masse, putting additional pressure on the pair. As a result, the EUR/USD bulls were forced to retreat to the bottom of the 19th figure. European inflation also did a disservice to traders (literally and figuratively), which significantly disappointed investors, turning out to be much worse than expected. Nevertheless, the pair still retains the potential for its growth – both from a technical point of view and from the point of view of the foundation, primarily due to the weak positions of the US currency.

The transition of the US Federal Reserve to targeting average inflation is called a historical event - and it is difficult to disagree with this statement. The resounding speech of Fed Chairman Jerome Powell at the economic symposium is still following the greenback. After all, the new strategy of the US central bank allows the regulator to keep base rates at the current record low level for a longer period of time. Figuratively speaking, the Fed agreed to tolerate inflation at a level above two percent, while not tightening the parameters of monetary policy. Moreover, the 2% level still needs to be reached - with a weak growth in the level of wages, low consumer activity and a high level of unemployment. There is no consensus among experts, but many of them agree that the rate will remain at the current level at least until the end of next year. Such prospects disappointed investors, after which the US currency's appeal noticeably dropped. The dollar index serves as an eloquent illustration of the current situation: the indicator collapsed to 91.81 points, that is, to a two-year low.

Against the background of such a fundamental picture, buyers of EUR/USD were able to emerge within the 20th figure today, reaching a price high of 1.2011. But they retreated almost immediately: firstly, traders did not dare to keep longs at such high positions, and secondly, European inflation, which turned out to be in the red zone was disappointing.

Thus, the overall consumer price index in the eurozone unexpectedly collapsed into negative territory, reaching the level of -0.2%. At the same time, the overall forecast of inflationary growth was at +0.2%. Deflation in the eurozone was recorded for the first time since the spring of 2016. Core consumer price index (core inflation), which more clearly reflects consumer trends (therefore does not take into account volatile goods and basic necessities, such as food, tobacco, and fuel) also sharply slowed from a July reading of 1.2% to 0.4% in August. Analysts expected a slowdown in this component, but to this strong (namely to 0.8%).

In other words, European inflation turned out to be even worse than the weak forecasts. This is a negative signal, but it can be associated with local outbreaks of coronavirus in some European countries (primarily in Spain, France and Germany). The increased risk of repeated lockdown forced Europeans to spend less and save more for a rainy day. These trends were reflected in the August CPI figures.

Considering today's release, we can assume that the downward correction of EUR/USD will continue: buyers, as they say, have room to fall. The nearest support level is not located at the round mark of 1.1900, but at 1.1840 - this is the middle line of the BB indicator on the daily chart, which coincides with the Kijun-sen line.

And yet, in my opinion, the pair will not go below the aforementioned target in the medium term. Traders are rightly concerned about the dynamics of European inflation, so today's correction looks quite logical. But at the same time, take note that the European Central Bank, unlike the Fed, did not change the inflation guidelines - this fact gives the euro an advantage over the dollar due to the long-term guidelines of the central bank.

In addition, the dollar is still under an array of its own problems, including political ones. For example, US Treasury Secretary Stephen Mnuchin just accused Democratic lawmakers of unwillingness to "negotiate in good faith." Let me remind you that the representatives of the White House and representatives of the Democratic Party in Congress have not reached a compromise on the new stimulus package. Democrats in the House of Representatives approved more than $3 trillion for this purpose back in May, while the Republicans controlling the Senate presented a $1 trillion stimulus package. Democrats are blocking the adoption of the bill in the Lower House of Congress, while Republicans are blocking it in the Upper House. And here it is worth noting that Mnuchin has expressed optimism about the prospects for the negotiation process over the past months. Therefore, his recent pessimism surprised many - this means that the dialogue between political opponents has finally reached a dead end.

Thus, at the moment, the EUR/USD bears can only afford a correction, since the fundamental problems of the dollar have not gone anywhere. Traders today simply did not take the risk of maintaining long positions amid slowing European inflation. The current price downturn can be used as a reason to open longs towards the main growth target in the medium term - the 1.2000 level. Moreover, we must not forget that August Nonfarm Payrolls data will be published on Friday, which may be in the red zone, given the increase in the number of initial applications for unemployment benefits.