EUR / USD ANALYSIS, WAR IN UKRAINE, BIDEN QUAD SUMMIT, US PMI DATA – PARAMETERS
- EUR / USD Volatility may rise in May Eurozone outbreak, US PMI polls
- Is the Russian ruble still ahead of the developing currency – will it last?
- Biden launches a strategic initiative: the Indo-Pacific Economic Framework
RENEWAL OF THE WAR OF UKRAINE
Sweden and Finland are struggling to fulfill their desire to join the North Atlantic Treaty (NATO) as Turkey accepts their application. Membership requires the approval of all 30 members. Ankara accuses northern countries of posting «suspected militants from the Kurdistan Workers’ Party (PKK), a group it views as a terrorist organization.”
These events took place against the backdrop of a vote in the US Senate for the approval of a $ 40 billion aid package to Ukraine. Russian troops continue to strengthen their positions in the east, focusing on the Donbass and Donetsk. Moscow is allegedly preparing offensive forces to attack the city of Severodonetsk. With such a seemingly insulting stance as Russia rules the West with sanctions?
The Russian ruble remains the most efficient currency in emerging markets with a total return of more than 33 percent since the beginning of the year compared to the emerging currency. US Dollar. Strong trade relations with China and India ensure the inflow of foreign currency into the country. European capital continues to flow in exchange for natural gas also despite the region’s alliance with the US in countering Moscow’s invasion.
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Moscow has been allowed to extend its debt service through a loophole called “sovereign debt allocation”. However, this temporary measure expires on May 25, and without the extension of Russia may face default. The panic caused by the prospect of such an outcome could spread and affect neighboring currencies, while strengthening the US dollar amid rising demand for liquidity.
EURO AREA, US ECONOMIC REPORTS
Economists expect that in May the rapid output, services and consolidated PMI for the euro area will be 54.8, 57.5 and 55.0 respectively. While estimates hover above the 50.00 mark – indicating an expansion and lower values - a reduction – traders may be cautious.
The macrofundamental environment looks increasingly bleak: geopolitical tensions in Europe with the war in Ukraine and declining growth in China due to COVID-19. Concerns about stagflation are at the forefront as price increases continue to be at highs for decades, and tightening lending conditions raise fears of a recession.
Analysts are also looking at U.S. PMI figures for the same time period with expectations for manufacturing, services and composite, which will show readings of 57.8, 55.5 and 55.5 respectively. As in the eurozone, if technically in the enlargement zone, these figures will mean a slowdown compared to the previous month.
The Federal Open Market Committee (FOMC) will also publish the minutes of its last policy meeting earlier this month. Nuanced comments will be key, as they can give traders a better idea of the committee’s prospects. What then may be the dynamics of the US dollar against euro?
Increasingly soft data from Europe could put bearish pressure on the single currency, although this may be limited as politicians stress the need to keep inflation under control. Emergencies will be needed for a major turnaround in the ECB’s monetary policy. Thus, it may limit the volatility of the euro to decline.
As for the US dollar, its advantage in profitability and leading status among world reserve currencies means that it can be attractive in terms of risk and risk exclusion. Having said that, the reversal is similar to what happened to EUR /USD in March 2020 remains possible. The currency pair then rose, but why?
The difference in interest rates between the US dollar and the euro at the time meant that the dollar had a deeper potential fall as to how much the Fed could lower rates compared to the ECB. Accordingly, EUR / USD rose. This dynamic has changedonce it was a price, however, and the couple dived. It is possible that something like this may happen again.
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BIDEN QUAD SUMMIT, DISCONNECTION OF INDO-PACIFIC STRATEGY
On Monday, US President Joe Bidenpresented its new strategy in Asia to counter the growth of Chinese influence: the Indo-Pacific Economic Framework (IPEF). The announcement came with a meeting of the Quad Alliance of Japan, Australia, India and the United States.
As China strengthens its regional position – leveraging its growing economic power and political influence through a number of new institutions – the United States seems to have felt the need to make a counter-offer. IPEF is committed to this function.
Concerns about increasingly hostile China are troubling its neighbors from Southeast Asia, especially Taiwan. This concern is exacerbated by President Xi Jinping’s calls to protect foreign assets and to ban ministerial officials (as well as their children and husbands) from owning significant assets abroad, directly or otherwise.
It would seem that this measure was launched after US sanctions led to the freezing or confiscation of some Russian assets. The game here may be to preemptively cut off the soft power vector that allows Washington (or another actor) to use offshore assets as a means to punish China for some future action. Politicians are concerned that these reshuffles are an early signal that Beijing is preparing to do something that it expects to disrupt the world order enough to demand a sharp response from the West.
EUR / USD TECHNICAL ANALYSIS
EUR / USD recently jumped nearly 3 percent from a five-year low of 1.0352. Prior to the brief recovery, positive RSI divergence indicated a slowdown in the decline. The good mood may continue until EUR / USD faces a resistance band between 1.0851 and 1.0933.
Daily EUR / USD chart
EUR / USD chart created by TradingView
If the steam also can’t be cleaned, it will probably send a bearish chill. Traders may conclude that the recovery was more a function of willing buyers looking to earn at a discounted price rather than beginning a longer sustained recovery. This can cause a sharp reaction and lead to a sharp sell-off.
Written by Dmitry Zabelin for DailyFX