FOREX Fundamental analysis
If even the traditionally problematic sectors of the American economy show positive trends, then the opponents of the dollar have no choice but to give up. The first surge in business activity in the manufacturing sector of the United States since September 2022 was the impetus for one of the sharpest rises in Treasury bond yields and a decline in stock indices. This optimistic background brought EUR/USD closer to the 1.07 mark.
The March increase in business activity in the manufacturing sector, by 2.5 points to 50.3, was an unexpected event for Bloomberg analysts. None of them predicted such a high rise in the indicator. Increased production and demand, as well as increased resource costs, increase the risks of a new round of inflation.
But if even the most vulnerable sectors of the US economy are starting to show signs of recovery after 16 months of recession, is it worth waiting for the economy to collapse? Investors believe not, and reduce the probability of a rate cut in June to 50%. The estimated scale of monetary expansion in 2024 has fallen to 65 basis points.
The markets recalled Christopher Waller's call to the Federal Reserve System to postpone the start of monetary policy easing to a later date and Jerome Powell's statement that the Central Bank can afford not to rush into making a decision. As a result, Treasury bond yields and, accordingly, the US dollar exchange rate strengthened in forex currency trading.
The fall in US stock indexes also supported the pessimistic mood towards the euro. The S&P 500 index, despite an impressive first quarter - the best since 2019, closed in the red after the release of the index of business activity in the manufacturing sector. A sharp collapse of the stock market is expected in the options market. The demand for put options that protect against such a scenario continues to grow.
If the S&P 500 index really falls from record levels, then the greenback will receive a powerful new support factor.
According to the theory of the "dollar smile", the greenback strengthens when everything is good or when everything is bad. Currently, the American economy is booming, and American exceptionalism is dragging EUR/USD down. However, if financial markets become mired in chaos due to the collapse of stock indices, the main currency pair will head for parity with even greater confidence.
A slight increase in the index of business activity in the manufacturing sector caused a flurry of reaction from traders, and ahead of the March report of the US labor market. EUR/USD is approaching the level of 1.07. We have one recommendation – to keep short positions.
EUR/USD Technical analysis
EUR/USD has reached the sellers' target–the 1.0729 - 1.0704 zone. A rebound is expected from here, as the target zone is a strong support area. In case of an upward correction, we are waiting for the quote to recover to the resistance within 1.0817 - 1.08. After working out the target, we will again consider selling the pair with a goal in the area of today's minimum.
If the Target zone 1.0729 - 1.0704 is broken down and the day closes below the lower boundary of the area, then the next target of the "bears" becomes the Golden Zone within the boundaries of 1.0645 - 1.0636.