05.01.202117:04 Forex Analysis & Reviews: EUR/USD. RMB records, US Senate by-elections, and "coronavirus anchor"

The euro-dollar pair is trading within the 22nd figure amid a conflicting fundamental background. On Monday, buyers made a cautious attempt to storm the 23rd price level, but as soon as the price surpassed the 1.2300 mark, the pair fell under a wave of sales, after which it fell by almost 100 points. Nevertheless, the EUR/USD bears were unable to seize the initiative, so the upward trend is still in force.

In the kaleidoscope of recent events, several fundamental factors can be identified that determine the current dynamics of dollar pairs, and most importantly, will determine in the medium term.

Let's start with China. The unexpected correction of the USD/CNY pair provided some support for Asian currencies (primarily the Australian dollar), and this fact stimulated a broader greenback sell-off. The US dollar index returned to the 90th mark, reflecting the skeptical attitude of the market to the US national currency.

It is worth noting that the Chinese yuan started the new year with a powerful spurt, rising to a 31-month high against the US dollar. During Tuesday's Asian session, the yuan was trading at 6.429 – its strongest level since June 2018. The Chinese currency rose by almost 1.5% in the first trading days of this year, while last year it strengthened by 6.27%. The downward momentum of USD/CNY has developed after overcoming last year's resistance level of 6.52. According to economists surveyed by Bloomberg, such dynamics are due to the recovery of the Chinese economy, the double deficit of the United States (a record current account deficit in the United States combined with a growing budget deficit), and the dovish rhetoric of the Fed. During its recent meeting, the US regulator clarified that it will not rush to curtail large-scale incentives even if the main parameters of the US economy grow steadily.

According to experts, the Chinese yuan will continue to strengthen (and the dollar will continue to lose its position) - if the Democrats take control of the Upper House of Congress following the results of the by-elections to the Senate. Let me remind you that at the moment, representatives of the Democratic Party control the House of Representatives (the Lower House of Congress), while the White House will soon be headed by Democratic leader Joe Biden. Now it is vital for the Democratic camp to take the Senate. In this case, they will hit the jackpot: Biden will be able to carry out structural reforms without looking back at the wishes of Republicans, who at the moment can block legislative initiatives in the Upper House of Congress.

That is why all attention today is focused on the state of Georgia, where the second round of elections to the Senate will come to an end during the American session, the outcome of which depends on who will control it – Democrats or Republicans.

Georgia fills the last two vacant seats: if at least one of the Republicans is re-elected, the current balance in Congress will remain (i.e., the Upper House will be controlled by the Republican Party, the Lower - by the Democratic Party). Otherwise, the Democrats will get full power: they will be able to freely promote many of their initiatives, which are opposed by Republicans. If this scenario is implemented, the dollar will be under additional pressure against the background of the likely growth of the stock market and a decrease in the yield of treasuries. In addition, if the Democrats win, the probability of a political crisis caused by the behavior of Trump, who still does not intend to admit his defeat in the election, considering Biden illegitimate, will decrease.

According to American journalists, the state of Georgia is considered the fiefdom of the Republicans, while representatives of the Democratic Party have not won there for several decades. On the other hand, the situation is ambiguous. The presidential election showed that this state can already be attributed to the status of "vacillating". Therefore, the intrigue regarding the election results (counting of votes will begin today) remains.

Against the background of all the above events, the dollar index shows a downward trend: traders do not risk investing in the US currency. However, buyers of EUR/USD are not in a hurry to use the vulnerability of the greenback. The coronavirus is to blame, which acts as an anchor for the pair quotes. Despite the start of the vaccination process in Europe, the epidemiological situation in key EU countries remains severe. For this reason, for example, Germany decided to extend the lockdown until the end of January. Similar decisions were taken, in particular, by Italy and Greece. Such trends do not allow EUR/USD bulls to develop an upward trend, despite the vulnerability of the US dollar.

Given the current fundamental picture, longs can be considered only for "short distances" - from the current levels to the upper line of the Bollinger Bands indicator on the daily chart (i.e., to the mark of 1.2320), which acts as the main resistance level. Despite the "coronavirus anchors" the pair's sales are now riskier, as the greenback's position is still extremely weak. Even if the Republicans win in Georgia, the EUR/USD bears will receive only temporary support: the price decline can be used as a reason to open longs.