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The price accounts for everything. Investors are convinced that the markets know everything. What does the EUR/USD rally mean amid the ongoing conflict in the Middle East? Does it indicate that it will end soon? Is Donald Trump telling the truth by announcing a complete victory over Iran within two weeks? Does anyone truly believe that? There is another possibility. The rise of the euro is nothing more than the fact that the "bulls" are being led to the slaughter. After the release of U.S. inflation data, the primary currency pair is set to crash. For now, we'll let the regional currency enjoy its counterattack.
While the U.S. economy is flourishing, the Eurozone is just beginning to show signs of life. This is evidenced by the first increase in Germany's industrial production since the start of the armed conflict in the Middle East.
However, this is just a drop in the ocean of European problems. The currency bloc's economy is weak and will not withstand the European Central Bank's tightening of monetary policy. The EUR/USD rally is not the result of a narrowing divergence in GDP growth between the U.S. and the Eurozone. It is nothing more than a victory of optimists over pessimists. Additionally, it is a result of FOMO, or the fear of missing out on profits. There is a prevailing narrative in the market that a deal between Washington and Tehran will turn winners into losers and losers into winners. Will the euro become the favorite? Then the moment should not be missed!
Unfortunately, the regional currency will not be the winner. All the "bulls" of EUR/USD can hope for are temporary pullbacks to the downward trend. The rally in U.S. Treasury yields also speaks volumes. It is likely that the Federal Reserve will soon raise rates.
Which market is mistaken? The currency market, which paints an optimistic outlook for the euro with its weak Eurozone economy and the danger of political missteps by the ECB in the form of premature tightening of monetary policy? Or the bond market, with its demands for the Fed to raise the federal funds rate? Only time will tell the answer to this question.
For now, it makes sense to wait for the opening of U.S. stock indices to understand what is happening with the global risk appetite. If it rises amid expectations of de-escalation in the Middle East conflict, the EUR/USD rally will make sense. If it falls, investor interest will shift back to safe-haven assets like the U.S. dollar.
Alas, markets can also make mistakes. Perhaps because they are driven by people. There's a saying that markets have predicted nine recessions out of five. I would not be overly optimistic about the euro's rally ahead of the release of U.S. inflation data.
Technically, on the daily chart, the EUR/USD pair has bounced off a local bottom. However, as long as the previous long-bodied bar is not surpassed, "bears" will dominate the market. Therefore, a rebound from resistance levels at $1.1585 and $1.1615 or a return of the euro below $1.1555 will provide grounds for selling.
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