20.09.202123:06 Forex Analysis & Reviews: EUR/USD. Hawk expectations and the "Chinese Lehman Brothers"

The euro-dollar pair approached the base of the 17th figure, testing the support level of 1.1710 (the lower line of the Bollinger Bands indicator on the D1 timeframe). The EUR/USD bears did not dare to storm the 16th price level, but at the same time they outlined further prospects for the downward direction. Most likely, the bears will still push the support level of 1.1710, heading to the main price barrier of 1.1650, that is, to the area of the annual low (1.1664). The last time the pair was at such lows was a month ago - on August 19-20. Back then, the greenback was strengthening its position ahead of Federal Reserve Chairman Jerome Powell's speech at the economic symposium in Jackson Hole. It was expected that Powell would give the go-ahead to curtail incentives, while at the September meeting, the members of the central bank will already officially announce the appropriate steps regarding QE. On the eve of this event, the dollar was in high demand – traders followed the trading principle "buy on rumors, sell on facts". As soon as Powell disappointed the dollar bulls with his indecision, the greenback came under a wave of sales.

Today, the dollar is getting more expensive throughout the market, both due to hawkish expectations, and due to the growth of anti-risk sentiment in the markets.

According to most experts, the Fed will take a wait-and-see position the day after tomorrow, but at the same time it will hint at curtailing incentives until the end of this year. Despite the slowdown in inflation and failed Non-farms, the members of the Fed are most likely not to abandon their intentions. At the moment, representatives of the Fed observe a silence regime, since they are prohibited from speaking in public ten days before the meeting. But up to this point, many of them demonstrated their belonging to the "hawk wing" of the central bank.

In particular, the head of the Federal Reserve Bank of St. Louis, James Bullard, said in early September that the central bank should weaken the volume of fiscal stimulus. In his opinion, the so-called taping will begin "this year" and will be completed in the first half of next year. His colleague, the head of the Federal Reserve Bank of New York, John Williams, also voiced rather hawkish theses. He similarly stated that the reduction in the volume of asset purchases should begin before the end of 2021. In his opinion, the standard for inflation is "clearly met" and the central bank is ready to normalize monetary policy. A similar opinion was voiced by some other representatives of the US central bank. The very fact that in the future of the coming months (even if not in September), the Fed will take the first step towards normalizing monetary policy is supporting the greenback, which is steadily strengthening throughout the market. Also, some currency strategists do not exclude the possibility that the updated dot chart of the Fed will show the prospect of a rate increase at the end of next year.

However, the dollar is getting more expensive not only due to hawkish expectations. The US currency is now actively used as a protective asset, against the background of the situation that is unfolding around the Chinese developer China Evergrande Group. This company has the largest debt among developers around the world - approximately $310 billion. This is about 6.5% of the total debt of Chinese real estate companies. Evergrande is obliged to pay interest in the amount of $84 million on its bonds (March 2022) in three days (September 23) and almost $48 million by September 29 (interest on bonds for March 2024). If the company does not pay the specified amounts within a month from the date of the planned payment, both bonds will be declared in default.

According to most experts, the default of Evergrande is an inevitable event. At the same time, there is no consensus on the extent of the consequences of this event for financial markets (including foreign exchange). Some call Evergrande "China's Lehman Brothers", while others urge not to dramatize the situation, since the company's creditors are Chinese banks controlled by Beijing, and the state balance sheet can easily cope with Evergrande's debts. In general, according to analysts, much will depend on whether this company will be restructured or completely liquidated. And although most experts are inclined to the first scenario, the general market nervousness supports the greenback – the dollar is in high demand as a protective asset.

Thus, on the side of dollar bulls is the hawkish position of many representatives of the Fed, as well as the growth of anti-risk sentiment against the background of the situation with Evergrande. The European currency, in turn, was under pressure today after a speech by a member of the ECB Governing Council – this time Martins Kazaks. He said that the European economy "will need support in addition to PEPP." He also stressed that the central bank will be "very, very careful when rejecting incentives." In general, even timid calls for curtailing the emergency bond purchase program do not support the euro – after all, with the end of PEPP purchases, the European Central Bank is not going to stop using the APP in the near future (according to rumors, the ECB may significantly increase this program next spring).

All this suggests that the downward potential of the EUR/USD pair is still not exhausted. Throughout today, the bears have tested the support level of 1.1710 several times (the lower line of the Bollinger Bands indicator on the D1 timeframe), but they could not settle below this target. At the same time, the price is located under all the lines of the Ichimoku indicator, which shows a bearish Parade of Lines signal. If the bears still "push through" the support level of 1.1710, they will open their way to the area of the 16th figure. The next target will be the current year's low - the mark of 1.1664.