USD Index: Focus on Signals from the Fed and Congress

Trading Tips

Exports and imports of Germany, the biggest economy of the EU, indicated an improvement in May compared with April. It is not a surprise since lockdowns in April reached their peak in the EU. In monthly terms, exports grew by 9%, after falling by 24% in April. However, compared with February volumes, exports are 26% lower. Imports increased slightly (+3.5%) which casts shady on sustainability of spike in consumption after lockdowns were lifted, since change in imports are a kind of forward-looking indicators and reflect expectations of future domestic demand.

The data is interesting in the sense that global trade indicators for May spoke in sync that foreign demand continued to stall. If you look at trade figures of Asian economies (which are also export-oriented), the situation there is similar – weak export growth or even MoM decline in May. The divergence of foreign with domestic demand which rebounded in May suggests that the growth in consumption is forced and probably unstable. It was achieved due to the use of “steroids” in the form of fiscal programs of the EU government, which has evolved from a long-term saver to a big spender.

However, combined policy of the Fed and US Congress is suppressing any attempts of USD buyers to seize the initiative. Therefore, in currency pairs with USD, including EURUSD it’s crucial to analyze expectations related to the Fed and US government. The government is clearly inclined to borrow more because of signals of deterioration in rising US economic activity and the Fed will likely to continue to “collect” government debt on its balance sheet, because there is no other way to generate demand that can replace the lost demand in consumption and investment. The negative picture of USD is also confirmed by technical developments:

From the beginning of June, the bearish trend turned into a correction, which ended with the development of a fairly symmetrical double top. Usually this is a trend reversal pattern, but sometimes it acts as a continuation pattern, which is possible in our case. A convenient moment for sales may be a return to the key support zone at 96.50. We can set a fairly attractive stop loss not higher than intermediate resistance at 97.00, with reasonable take profit target – the previous low at 95.50-95.60.

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