EUR/USD: will a lifeline help the dollar?

EUR/USD, currency, EUR/USD: will a lifeline help the dollar?

FOREX Fundamental analysis for EURUSD on March 30

The dynamics of foreign exchange assets in the forex market depends on many factors. This is the difference in rates of monetary policy, economic indicators, and various risks - financial and geopolitical. But there is one more important trading criterion - volatility of currency pairs. The breadth of quotes fluctuations of this or that asset allows you to earn in currency trading on the forex market. Volatility has lately been supporting the dollar, sending EURUSD into a downward correction.

BofA analysts note that expectations of a Fed interest rate hike to 5.25% have lifted volatility in the major currency risk to three-month highs. But volatility peaked last fall. At that time, the dollar index was the undisputed leader among other forex indices.

EURUSD dynamics and volatility of the main currency pair

EURUSD dynamics and volatility of the main currency pair

Of course, much of the demand for the greenback stems from the habit of investors to buy the dollar at any alarming signals. In 2022 it was the dollar that was the main defensive asset at Forex. But now that the epicenter of the banking crisis has become the United States, investors began to look at other protective assets, gold, the yen, the franc and...... the euro.

The BofA believes that increased volatility in currency pairs could return when U.S. inflation is high. This is a logical explanation, as the Fed still considers the fight against inflationary pressure to be its main task. Now the regulator's monetary policy has been interfered with by fears of spreading banking problems and the futures market is lowering the maximum rate to 4.9%. However, if the situation in the banking sector stabilizes, it is unlikely that the Fed will move to a wait-and-see attitude, risking the loss of all gains from previous restrictions.

The dynamics of the expected rate peaks of the Fed and the ECB

The dynamics of the expected rate peaks of the Fed and the ECB

Of course it is not rational to expect a 6% rate from the Fed, but 5.5% is a realistic target which has been discussed many times at FOMC meetings. In any case, the ECB's potential for a 75-100 basis point rate hike creates support for the single currency. But this is in the medium and long term. In the short term, volatility growth favorable to the greenback cannot be ruled out.

In addition, let's not forget the basic rule of forex trading - "buy on rumor, sell on fact". Markets are excited about the prospects of European inflation growth up to 5.7%, but the statistics release might turn out to be a disappointment for the "bulls" in EUR. On the technical side - if the EUR/USD buyers are unable to get a grip on 1.082, it will be possible to sell the pair in the short term.

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