This morning, the euro/dollar pair abruptly collapsed to the base of the fifth figure, updating a three-week low in price. Although the price hit the 1.0700 support level (the top line of the Bollinger Bands indicator on the D1 timeframe) yesterday, the price has since retreated. Interestingly, there was no formal explanation of a fundamental nature for why there was such a rapid bend to the south.
Today's economic schedule for EUR/USD is relatively quiet: The crucial release on Tuesday will only be available in the afternoon. We shall learn the early figures for Germany's December inflation growth. German labor market data were released in the first half of the day, although this release is unrelated to the market's overall strengthening of the US dollar. In addition, the report was positive: unemployment in Germany maintained its November level in December (5.5%, with a modest increase, projected to 5.6%), and there were 13 thousand fewer unemployed people than expected, as opposed to projections for a 15 thousand increase.
Trading in EUR/USD, however, disregarded this release. The pair moved in lockstep with the US dollar index, which in a matter of hours went from 103.23 to a daily high of 104.54. All currency pairs in the major group were impacted by these dynamics, and the euro/dollar pair was no exception.
Regarding the nature of the US currency's behavior at the start of Tuesday's European session, there is no agreement on the market. I believe that several diverse basic reasons that were simmering last week and have now become apparent have increased demand for a secure dollar.
Generally speaking, the strengthening of the dollar is advanced in character on the eve of the release of the minutes from the Fed and nonfarm meeting in December, as well as against the backdrop of rising anti-risk sentiment. Due to unstable market conditions, it is dangerous to initiate short bets on the EUR/USD pair at the moment. First of all, the suddenness of the price cut and the absence of a convincing explanation are concerning.
There are numerous verbal explanations of the current situation available.
It is clear that China indirectly supports the safe dollar. Let me remind you that the Chinese government repealed several restrictions associated with the "zero tolerance" COVID policy towards the end of last year. Following that, the prevalence of coronavirus in the country skyrocketed. Unofficial reports claim that between 250 and 300 million Chinese became ill in December, overwhelming the PRC's healthcare infrastructure. According to media reports, hospitals are congested in most areas. It is also reported how busy the crematoriums are (the WHO reports that in China, only 40% of those over 80 received the recommended three doses of the vaccine).
The market's stance on the recent events in China has shifted multiple times during the past several weeks. At first, the safe dollar was supported by an anti-risk mentality. The markets' appetite for risk then rose once again when Beijing made it apparent that it would not tighten its COVID policy.
However, it appears that the pendulum has now swung back toward panic, giving dollar bulls cause for increased confidence. Additionally, the rise in the number of cases is secondary; China is not likely unable to control a significant outbreak of the disease. The market is still seeing the situation in China through the lens of potential economic repercussions. And these repercussions appeared quickly.
Thus, contrary to expectations of a reduction to 48 points, the manufacturing PMI for December in China decreased to 47.0 according to the data released today and on Saturday. For the third consecutive month, the indicator is below the critical 50-point threshold. Today's Caixin manufacturing PMI index for China dropped to 49.0, placing it in negative territory. This dynamic, according to many analysts, is brought on by the worsening of China's epidemiological situation, which is causing a temporary labor shortage and more supply chain disruptions.
The Chinese factor is not the dollar's only ally, though. Before the release of the December Fed meeting minutes, in my opinion, the dollar is in high demand. Let me remind you that the December meeting's outcomes put pressure on the US dollar due to Jerome Powell's dovish remarks (which permitted a downward estimate of the PEPP's current tightening cycle's terminal point) and a pause in rate hikes. John Williams, the president of the Federal Reserve Bank of New York, addressed the audience after the meeting and shocked the markets with his hawkish stance. He specifically stated that the rate of increase in consumer prices in the United States is "stubbornly high." In addition, he said that the regulator would increase the base rate "as far as it takes to bring inflation under control," which might go over the proclaimed maximum of 5.1%. The United States inflation rate has started to decline, but, according to Williams, who has a permanent vote on the Open Market Operations Committee, "a considerably more significant slowdown is required so that the Fed may soften its position on the need to tighten policy."
The minutes of the December meeting have become more important in light of these contradictory signals. The dollar will get a lot of support if the document's wording is primarily hawkish. Now, the value of the dollar is rising in advance following the "buy on rumors, sell on facts."
However, the fact that the EUR/USD price fell by 150 points without any discernible, tangible, or clear causes is concerning. Since the aforementioned fundamental elements grew in strength throughout the New Year period and now have the function of a trigger, it may be concluded that such dynamics are also caused by the fact that today is the first working day of 2023. Given that such impulsive moves on such fragile bases are typically unstable, it is impossible to discuss the priority of short positions on the EUR/USD pair in this instance. Right now, it is best to adopt a wait-and-see strategy, keeping an eye on how the price moves around the 1.0505 support level. The Fed procedure in this situation can play a significant role in the medium term, supporting or weakening the US currency. If the bears can break through this price barrier, then in this case it will be possible to talk about the first symptoms of a resumption of the southern trend.
Relevance up to 12:00 2023-01-04 UTC+1 Company does not offer investment advice and the analysis performed does not guarantee results. The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 82.74% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
