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Dollar shone with a new luster

At the end of March, there was a lot of talk on Forex that the U.S. dollar was running out of strength. They say that its main trump cards were won back. No matter how much FOMC officials talk about raising the federal funds rate by 50 basis points in May and about its rapid growth to a neutral level of 2.4-2.5%, this did not frighten the EURUSD bulls. Moreover, the negotiations between Russia and Ukraine gave rise to hopes for an early ceasefire in Eastern Europe. Unfortunately, the dialogue on the peaceful settlement of the armed conflict has stalled, the U.S. dollar has a new driver for growth, and the euro has been hit by political troubles.

Investors still remember the taper tantrum of 2013, when, against the background of the unexpected collapse of the Fed's balance sheet, the debt market reacted with a surge in yields, dealing a serious blow to both stocks and assets of developing countries. In 2017-2019, the Fed decided not to rake over old coals and prepared investors for QT for a long time. Today, too, it cannot be said that the decision to reduce the scale of assets is some kind of surprise. Another thing is the speed at which it will go.

Unlike the events of 5 years ago, when the Central Bank slowly increased the volume of bond sales from $10 billion to $50 billion per month, now the figure of $95 billion was immediately announced. Moreover, in history, about two years passed between the first increase in the federal funds rate and the beginning of the collapse of the balance sheet. Currently, the Fed is ready to reduce this period to two months! The market has smelled a repeat of the 2013 taper tantrum, should we be surprised by the rally in treasury bond yields and the dominance of the U.S. dollar?

Dynamics of the Fed's balance sheet


A new round of sanctions against Russia over war crimes in Ukraine has dealt another blow to the European economy. Its dependence on Moscow results in a break in ties, which negatively affects GDP. The EU's refusal to import coal from the Russian Federation may be the first sign. Investors do not rule out the accession of the European Union to the U.S. embargo on Russian oil, but that's a completely different story.

At the same time, the presidential race in France exerts pressure on the position of the "bulls" on EURUSD. Opinion polls show that the current head of state Emmanuel Macron will win in the first round, but in the second he will face serious competition from opposition leader Marine Le Pen. And even if she no longer insists on abandoning the euro, she intends to slow down the processes of European integration in case of her victory. The reduction of the gap from 60% to 40% a month ago to 53% to 47% suggests that the fight will be hot. This forces investors to hedge the risks of euro subsidence.

The dynamics of the euro and its reversal risks


The main economic event of the week by April 15 will be the release of data on U.S. inflation, which, according to Bloomberg experts, will continue to accelerate from 7.9% to 8.3%. This could potentially lead to an increase in bond yields and a strengthening of the US dollar.

Technically, there is a transformation of the Shark pattern into 5-0 on the EURUSD daily chart. At the same time, pullbacks to the levels 1.093, 1.098, and 1.102 should be used for sales.

EURUSD, Daily chart


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