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The Dollar is not going to give up leadership in forex

Fundamental analysis of FOREX for April 12, 2021

In March, forex trading was carried out under the sign of the US dollar. The first decade of April turned out to be the worst since December for the greenback. The attitude to the American currency changed against the background of the continuing growth of the US stock indices and after the stabilization of the yields on debt bonds.

Of course, the S&P 500 should stop sometime, and after the break, Treasury rates will go up again, receiving support from the impulses of the US economic recovery, which will hit risky assets through currency correlation. However, do not forget that buyers of EUR / USD may find their trump cards.

In 2021, massive stimulus, hopes of getting out of the crisis and expectations of high corporate profits have strengthened the S&P 500 by 10%. Since the beginning of the year, the index has rewritten its historical maximum 20 times, which looks quite logical against the background of Wall Street’s forecast of profit growth from 16% to 24%. But, some experts warn that high indicators are not obtained due to economic growth, because during the year corporations, for obvious reasons, could not work at full capacity, but because of the low calculation base.

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Dynamics of the S&P 500

The market is trying to figure out if all the news is included in the prices? It is possible that in order for the S&P 500 to continue to grow, companies will need not to confirm, but to overfulfill forecasts.

FactSet believes that the S&P 500 P / E is trading above the five-year average of 18.14, and is currently at 22.6. The stock market has become quite expensive, so surges in Treasury yields can spoil the sentiment of buyers of stock indices and EUR / USD.

This week, the strength of stocks will test the US inflation report. Bloomberg predicts 2.4% growth. According to experts polled by the Wall Street Journal, in June CPI will be released by 3%, but by December it will drop to 2.6%.

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Inflation is propelled by a strong recovery in the US economy, which is expected to outpace Europe’s by 2 percentage points in 2021. Such an imbalance was observed in 2017, but then EUR / USD was quoted at 1.05.

Divergence in US and Eurozone Economic Growth
Divergence in US and Eurozone Economic Growth

If the S&P 500 begins to correct with a simultaneous rise in Treasury yields, then EUR / USD buyers will have a hard time. We saw a test test in March, when the pair fell to the November lows. True, there is hope that in the second quarter the authorities of the Eurozone will finally solve the problem with vaccinations, so it is possible that the positions of the single currency will be much stronger.

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A break of the resistance at 1.1930 will allow the bulls to raise EUR / USD to 1.20. If sellers are able to gain a foothold below 1.1850, then the asset will go down to 1.1790. I believe that the scenario of the continuation of the mid-term consolidation looks the most realistic.

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