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The euro/dollar pair has once again demonstrated a southern impulse. However, yesterday's correction did not continue as the bears returned the price to the area of the 12th figure. Such price dynamics are fully justified because the single currency is now under pressure not only from the economic problems of the eurozone but also from political uncertainty in Spain.
However, Spanish politicians are the only ones that make traders nervous. In France, the protests of the "yellow vests" do not subside and in Italy, the trade unions recently protested, where representatives of the association of industrialists joined them. Experts warn that such sentiments on the eve of the elections to the European Parliament, which will be held in three months, are a wake-up signal to the markets. The popularity of populist and nationalist political forces is growing in the EU countries, so the results of the general European elections may unpleasantly surprise.
According to preliminary forecasts, there will be more groups in the European Parliament, while representatives of large factions will not be able to repeat their previous results. This is fraught with the fact that the European Parliament will be fragmented, and coalitions will be created with great difficulty. In addition, according to a number of political scientists, Eurosceptics will block many initiatives, primarily in the sphere of migration legislation.
In this context, the latest German local elections look significant, which were held last fall. The results of the plebiscite showed that electoral preferences are changing in Germany and these changes are not in favor of European integration. The main sensation of the last election was the incredible success of the ultra-right. For four years, they strengthened their positions tenfold and were able to get into parliament, reflecting the prevailing attitudes in society.
In other words, factors such as the popularization of ultra-right political forces, the intensification of anti-immigration rhetoric and the increasing role of nationalist ideas weigh on the prospects for the development of the European Union. Similar trends can be reflected in the outcome of the pan-European elections. This fact puts pressure on the single currency, especially against the background of a slowdown in the key indicators of the eurozone and softening the rhetoric of the ECB.
Yet, Spain has become the catalyst for today's price decline of EUR/USD pair. There will be extraordinary parliamentary elections again for the third time in a row over the past four years. The deputies could not find a compromise on the proposed budget, forcing the prime minister to announce early elections. Thus, on April 28, the Spaniards will not only appreciate the work of the socialist government but also change the political format of the parliament - at least, many local experts are sure of it.
It should be noted here that the events in Spain should not be viewed only in a negative context. Despite the fact that any extraordinary elections are certainly stressful for the markets, their results can positively affect the single currency. The fact is that literally the other day there was a mass protest in Madrid, which was attended by tens of thousands of local residents. They protested against the country's Social Democratic Prime Minister Pedro Sanchez, who in their opinion, behaves "too liberally" in relation to the Catalan government and supporters of the separation of the region from Spain. In other words, the protesters spoke in favor of the unity of the country, expressing protest to the current government and parliament (until March 5), if pro-European political forces come to power (in particular, representatives of the Citizens Party) following the spring elections.
Despite such possible prospects, the market reacted negatively to today's events in Spain. Traders are focused on current events while long-term projections have little effect on the dynamics of the EUR/USD pair. Investors are concerned about the growing political uncertainty in the eurozone countries, as well as, the slowdown of the EU economy and vague prospects for Brexit.
In addition, the likelihood of a resumption of the trade war between the United States and China has increased again despite the ongoing negotiation process. According to Chinese leader Xi Jinping, trade negotiations will be resumed with their next round to be held next week in Washington. Representatives of the negotiating group avoid any specifics in their comments. The essence of their statements comes down to the fact that they have made some progress, although there is still a lot of work to be done. Such veiled statements alarm traders, given the fact that the "deadline" on March 1 is just around the corner.
Thus, the single currency is still not strong enough to recover. In such circumstances, any more or less large-scale correctional growth of EUR/USD pair should be considered as an occasion to open short positions. The nearest southern target is 1.1230, which is the bottom line of the Bollinger Bands indicator on the daily and weekly charts. If the bears consolidate below this support level, they will open the way to the level of 1,1100, which is the bottom line of the Bollinger Bands but on the monthly chart.
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