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The US dollar index continues to hold above the 90-point mark, reflecting increased demand for the dollar across the market. The US currency is growing due to a combination of several fundamental factors – political instability in the US, Treasury yields' growth, downturn in the stock market, Taiwan factor and the expectation of additional fiscal stimulus. These are the main reasons for investors' growing interest in the US dollar. However, the main question is whether this interest in the US currency will continue after January 20, when Joe Biden will become the head of the White House. At the moment, the dollar's impulse growth has slightly faded: the market played back yesterday's events in Congress and took a break in anticipation of new information drivers.
In general, the events are happening quite predictably. It should be recalled that Democratic representatives want to remove Donald Trump from office (despite the fact that his term ends in a week) using one of two levers of influence: either through the 25th Amendment to the US Constitution or through impeachment. The first option has already been rejected by the country's Vice President Mike Pence, which is quite expected. In this case, the second option remains – impeachment. Yesterday, the Democrats presented a resolution to Congress, in which the head of state is accused of "inciting an uprising." The released document states that President Mr. Trump has put the security of the United States and government institutions at serious risk.
The resolution to impeach Trump was previously supported by 218 House Democrats. This is already enough to approve the document during a vote in the Lower House of Congress, which will be held on Wednesday. However, the question of the president's guilt and removal from office is decided by members of the Upper House of Congress – Senators. In the Senate, hearings are held on the charges, after which the corresponding verdict is concluded: guilty/not guilty. For example, the Senate (with Republican majority), acquitted Trump by voting against impeachment last year. Now, the balance of power in the Upper House has changed, after the Democrats won the by-election in Georgia. Unfortunately, these congressmen lack time to consider this issue: the Senate will not hold meetings until January 19. In addition, two-thirds of the votes in favor is necessary to make a guilty verdict. The Democrats in the Upper House have 50 votes out of the required 67. So, most experts doubt that 17 Republican senators will support the impeachment of their party member.
In other words, the press is actively inflating an "information bubble" that supports the rising anti-risk sentiment on the markets. Moreover, there were reports in the American press yesterday that far-right activists are planning armed actions in all American states and Washington. This was reported by the media companies ABC and Yahoo News, whose journalists got acquainted with the relevant report of the FBI. The official reaction of the department to the media publications has not yet been followed, but Trump already announced a state of emergency in Washington today to ensure the safety of the inauguration of Joe Biden. These fundamental factors only worsened the situation, maintaining interest in the safe dollar.
On another note, the Taiwan factor contributed to the continuing anti-risk sentiments. The United States recently decided to remove all restrictions on contacts between American and Taiwanese officials, which had been in effect for decades. In turn, Beijing considers Taiwan to be its province, which can be forcibly unified by mainland China if necessary. Therefore, such a step by the US State Department can be regarded by the PRC as interference in the internal affairs of the state. Another round of political confrontation between the two countries also allows dollar bulls to remain above.
Another factor that supports the US currency is the rising Treasury yields. In particular, the yield on 10-year Treasury bonds exceeded 1.10%, amid expectations of additional fiscal stimulus. This is a kind of signal that indicates the growing confidence in this year's US economic recovery.
In view of this, it should be noted that the market is increasingly likely to hear doubts that the Fed will keep the interest rate at the current record low level until the end of 2023. And although there are no obvious prerequisites for "hawkish intentions", many experts voiced the above idea. In addition, Fed Vice Chairman Richard Clarida said late last week that the US economy has a shaky year ahead, as the economy will feel the impact of coronavirus vaccination and a potential growth in government spending.
Thus, the current fundamental outlook allows the US currency to dominate in all major dollar pairs. If we talk about the EUR/USD pair, the downward impulse has currently faded, although the bears continue to control the situation. Here's an important point: the sellers of the pair could not even approach the support level of 1.2100 (lower line of the Bollinger Bands indicator on the daily chart), despite the three-day price decline.
Therefore, it is necessary to make trading decisions on this pair by keeping this in mind. If the pair breaks through this target, a trend reversal can be expected. In this case, the main downward target will be 1.1950 (middle line of the Bollinger Bands on the weekly chart). It is quite risky to open short positions before breaking through the support level of 1.2100 due to the possibility of reaching the bottom of the market.
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