15.04.202103:51 Forex Analysis & Reviews: EUR/USD: the dollar remains under pressure, and the euro will enjoy success as long as the market adheres to the Fed's scenario

Last month was marked by a noticeable increase in the US currency, which strengthened against its main competitors by almost 3%.

The rise in the yield on 10-year treasuries, which reached its highest level since January last year at around 1.77% in March, weighed on stocks and supported the dollar.

The threat of increased inflationary pressure in the United States, associated with active monetary and fiscal stimulus in the country, did not add to the optimism of market participants.

At the same time, representatives of the Federal Reserve tried to reassure investors with statements that low interest rates in the United States will remain for a long time, and the sharp increase in treasury yields reflects a higher rate of recovery in economic activity in the country. Many then believed that the regulator was simply turning a blind eye to the problem of active sales in the debt market, and feared that the US Central Bank would be forced to start curtailing monetary stimulus ahead of the deadlines specified in its economic forecasts.

Dollar bulls have already made plans to develop an upward trend for the USD in the direction of 94.25–94.30 (the highs of November 2020).

However, with the onset of April, investor sentiment has changed significantly. During the first two weeks of the month, the US stock market updates all-time highs almost every day. The dollar has lost more than half of its recent growth.

The fact is that the factors that previously gave rise to concerns about the further growth of risky assets and pushed the protective dollar up, now turned the market sentiment by 180 degrees.

Earlier, the S&P 500 index updated a record high, and the dollar fell to three-week lows in view of the release of data on US inflation for March.

Last month, consumer prices in the United States increased by 0.6% on a monthly basis. Investors had expected a more serious spike in inflation, but the increase in the index in March only slightly exceeded forecasts.

In addition, the rise in the CPI index was largely due to higher energy prices, which may stabilize in the next few months.

Moderate price pressure forced investors to take seriously the recent statements of the Fed representatives.

According to Richard Clarida, deputy chairman of the Federal Reserve, the regulator's forecast is that inflation will rise above 2% for a while this year, and then return to about 2% at the end of the year.

Apparently, the market is still adhering to the Fed's scenario, given that futures on major US stock indexes after the release of inflation data rushed up, and the dollar reacted to the publication of the release with another fall.

The decline in the dollar on Tuesday also occurred due to the fact that US bond yields fell, which reduced the attractiveness of the US currency, as steady demand at the auction of 30-year bonds outweighed the growth factor of consumer inflation.

The yield on 10-year US government bonds fell to 1.622% yesterday from 1.674% recorded on Monday.

Although the dollar has lost more than 1.5% in weight since the beginning of the month, an interesting point is that the market situation has not changed much over the past two weeks.

Treasury bond yields are still well above their levels at the beginning of the year, and the potential acceleration of inflation in the United States is also not an issue that can be resolved overnight.

Experts note that valuations in the US stock market are slightly overstated, and if the yield of treasuries rises slightly more due to increased inflation, this may put pressure on the stock market, as investors will have a more attractive alternative to stocks. This will play into the hands of the dollar.

So far, the US currency is forced to defend itself against its main competitors.

The USD index sank to three-week lows in the area of 91.85 points on Tuesday. And on Wednesday, it continued to decline, reaching the lowest levels since March 18 (around 91.60 points).

Meanwhile, the EUR/USD pair was able to continue rebounding above 1.1900 in response to the dollar's decline and the pullback of the treasury yield after the publication of US inflation data for March. The recent break above the 200-day moving average near 1.1895 provided additional momentum to the rally and set the stage for EUR/USD growth in the short term.

The question now is how high the single currency can climb.

One of the main events on Tuesday, along with the publication of the US inflation report, was that the US Food and Drug Administration (FDA) recommended suspending the use of the coronavirus vaccine produced by Johnson & Johnson due to cases of thrombosis.

This news put pressure on the dollar, as it strengthened market participants in the opinion that the Fed, in the face of a slowdown in the pace of vaccination in the United States, will be forced to start scaling back stimulus measures later than expected.

At the same time, Johnson & Johnson said that it decided to suspend the shipment of the vaccine to European countries as a precautionary measure.

While the United States is not overly dependent on this vaccine, the Old World (Europe) may need 3-4 months more to vaccinate 70% of the population. The loss of a second consecutive summer season could be devastating for the region's economy.

On Wednesday, EUR/USD continues to move up and is already trading in the immediate vicinity of the key resistance zone of 1.1980–1.1990, the breakdown of which will target the pair at the round mark of 1.2000, and then at 1.2025 and 1.2110.

Although in general, the main currency pair is showing a positive mood, its future fate depends on the vaccination against COVID-19 in the EU, as well as on how the ECB will react to the weakening of the dollar, which previously made it clear that it is uncomfortable with the EUR/USD rate above 1.2100.