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A strong economy means a strong currency. For those who have forgotten this basic principle of fundamental analysis, the way to the scaffold is open. The US dollar is poised to post its best weekly performance since October as investors finally woke up from the euphoria of the end of 2020 and began to reason sensibly. Yes, the S&P 500 rally continues. Yes, the global risk appetite is growing. But can the US dollar be considered the main safe-haven currency if Treasury yields are skyrocketing? They can already be used when playing on the difference because the rates for German counterparts are significantly lower. Wouldn't it be better to turn to economic growth in such a situation?
If in mid-2020 one of the main drivers of the EUR/USD rally was more effective management of the pandemic in the EU compared to the United States, then in terms of the speed of vaccine spread, the Americans clearly put the Europeans under the belt. In the United States, 27.2 million people, or 8.1% of the total population, were vaccinated against COVID-19. In the European Union - 10.7 million or 2.4%. Whoever defeats the coronavirus faster will quickly return to the trend in terms of economic growth. And so far, rates in the US are winning, which allows the dollar to grow. Usually, when the difference in the expected growth rates of US GDP and the rest of the world widens, the USD index goes up.
Dynamics of the USD index and the difference in GDP growth rates
Does the euro have no chance? Of course, it does. According to research from the University of Michigan, COVID-19 is highly seasonal. It peaks in late January and early February, after which the number of infected people begins to decline. This is confirmed by Nordea Markets data, according to which European countries and the United States are gradually moving away from extreme values for infections. If so, then in the next 4-8 weeks the restrictions will be lifted and the economies will exit lockdowns. We all remember very well how this turned out for EUR/USD in late spring to early summer.
Infection rate compared to peaks
The pent-up demand and an increase in the speed of vaccine distribution in the EU could fundamentally affect forecasts and give a shoulder to euro fans. Currently, the IMF expects that at the end of 2021, US GDP will be 1.5% more than at the beginning of 2020, and its European counterpart - 3.3% less. If the last figure improves, the EURUSD bulls will launch a counterattack.
The authority of Mario Draghi, who undertook to save Rome in the midst of a political crisis, should also play into the hands of the euro. At one time, the former head of the ECB saved the euro, his authority in the ranks of various parties in Italy is great because in his previous post he did a lot for the country. Reducing political risks is another argument in favor of buying the main currency pair.
Technically, the Wolfe Wave pattern is forming on the daily EUR/USD chart. Its activation requires a breakout of the 2-4 line and a return to the high of the bar at point 3. Both levels are located near the 1.208 mark. Its breakout will be the reason for buying the euro. For those who prefer to be proactive, it makes sense to start forming long positions in the event of a successful assault on the resistance at 1.199-1.2.
EUR/USD, daily chart
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