Pullback on EurUsd With Correction on Dollar?

Late last week, after the Democrats took the upper hand in the US Senate, the green currency gained against most currencies. Could this be a signal of an upcoming upward correction after 9 months of declines?

When trading forex, it is of course best to follow the trend, but we should not underestimate the recent developments in the US that may have an impact on the future of the USD.

  • Senate in the hands of Democrats

  • A new stimulus package on the horizon?

  • A bullish pin bar on the dollar index

The consequences of the Democrats taking power in the Senate are easy to predict. On Thursday, Joe Biden will present his proposal for an additional "trillion" in the stimulus program.

If anything even close to this gets through Congress in addition to the $900B already distributed, it could represent up to two years of economic growth. This week, Goldman Sachs increased its forecast for 2021 to +6.4%, and a large stimulus package could boost the results in 2022 as well.

A bullish Pinbar appeared on the weekly chart of the DXY dollar index that could suggest a further appreciation of the dollar. I have written DXY analysis last week with 4HR MFI bullish divergence, read it here

DXY Weekly Chart

If the DXY index were to continue gaining in value, its largest component - the Euro, representing 57.6% of the index should start to lose against the it.

So let's take a closer look at the EURUSD pair.

EURUSD in 2020 gained nearly 9% versus USD, reaching 1.2310 at the end of the year. In the first week of this year, price reached 1.2350, but last two sessions turned out to drops.

EURUSD Weekly Chart

On the daily chart, the price left the upward channel, and a bearish divergence appeared on the MFI.

EURUSD Daily Chart

On the H4 chart, we see that after the demand and 23.6 Fib reached buyers and the price turned upwards.

EURUSD 4hr Chart

It seems that a good place to open a short position would be to retest the defeated channel support currently at 1.2250-70. The downside scenario will be negated when the price breaks the last local high of 1.2290 and the MFI returns to gains.

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Dominik Stone

Tokenhouse Yard

City Of London, EC2R 7AS

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