Now that the markets have digested the Fed meeting, we are getting more clarity on how market dynamics stand (though that doesn’t mean that the charts have gotten any clearer yet). Indeed most Fx pairs have remained in their ranges, with EURUSD back exactly where it was before the Fed meeting after rallying by 80+ pips and then dropping by the same amount.

 

This is no surprise. We warned last week that the markets are not ready to break out yet, and sideways action was to be expected. That being said, some signs now emerge that suggest this USD bull trend can continue further. Particularly, EURUSD seems like the pair where the dollar’s outperformance may be most evident in the coming weeks.

Traders were disappointed by the Fed dot plot that signaled no rate hikes until 2024 – despite the very optimistic growth and unemployment projections – and sold the dollar. But, soon enough, they realized that if the Fed doesn’t raise interest rates by 2024, then other central banks will do so even later. With a speedy vaccine rollout, the Fed is comfortable with a stellar GDP growth forecast of 6.5% for this year. In contrast, EU countries are yet to reach wide vaccination rates, facing additional lockdowns due to a third wave of coronavirus outbreak.

 

The divergence in vaccine distribution between the EU and the US will translate into economic divergence, with a clear advantage for the US. This should keep the dollar support for as long as the EU is lagging behind with the fight against the pandemic. EURUSD at 1.16 seems to be a fairer price to reflect this EU-US divergence than where the pair currently trades close to 1.20.
 

 

Instead, optimally EURUSD will give us another rally that we can sell, preferably above 1.20, followed by a swift reversal back below 1.20. Such a scenario would provide a clear sell signal that is likely to take EURUSD to at least 1.18, and probably 1.16 as well. 

 

In the preferred scenario, the resistance trendline of the descending channel will come into focus as a potential reversal zone and entry area (see chart). Additionally, the 55-day and 100-day MAs (blue and orange lines) meet with this resistance trendline in the 1.2050 area. Note, however, that it wouldn’t be surprising if EURUSD exceeds the 1.2050 level in this scenario. In fact, it’s probably likely, as has the pair done many times in the past around resistance areas. So, such a potential reversal could happen closer to the 1.21 level and possibly even go as high as 1.2150. In a contrary scenario, only a breakout above 1.2150 would re-establish the bullish dynamics and negate this bearish setup.
 

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