The US dollar index was actively declining on Tuesday, after sharply rising in two days. The main dollar pairs have changed their patterns: for example, the EUR/USD pair bounced off the local low (1.0910) and approached the limits of the 1.10 area again. Generally speaking, the bearish prospects looked quite doubtful, amid the hawkish European Central Bank sentiment and disappointing US macro data published last week. Federal Reserve Board member Christopher Waller, who complained about high inflation and supported further rate hikes, came to the greenback's aid. However, this fundamental factor provided only temporary support for the dollar.

Push and pull

Looking at the weekly EUR/USD chart, we see that the pair has shown consistent growth for a month and a half. Last week, traders updated the annual high (1.1076) but could not approach the borders of the 1.11 area. Bulls took profits, extinguishing the bullish momentum. Bears took the initiative, attempting to pull the price below the 1.0900 mark. However, they also failed: the bearish attack ended at the base of the 1.09 area.

Such a "push and pull" situation is due to a contradictory fundamental background. The US currency received support from Waller, who last Friday stated that the prolonged fight against inflation "has not led to significant progress," and therefore "additional interest rate hikes" are needed to curb price growth. However, he did not specify how many more rate hikes he is ready to support. But the important point here is the phrasing itself, which implies several rounds of rate hikes. Before this, many of Waller's colleagues allowed for one - the May - quarter point rate hike in their stance. The Fed's updated median forecast in March also assumes one more (final) step towards tightening monetary policy. Therefore, Waller's unexpected remark about the need for several hikes surprised investors and strengthened the greenback. But not for long - just for two trading days.

The fact is that there are currently no objective reasons to believe that the Fed is ready to go above 5.25%, that is, to resort to another round of hikes after the May meeting. And although the tension in the US banking sector continues to ease, recent macroeconomic reports (ISM indices in the manufacturing sector, service sector, retail sales volume, contradictory Nonfarm payrolls) reminded market participants of the consequences of tightening monetary policy. Moreover, overall inflation in the United States is declining quite actively (both the core PCE index and the producer price index). Only the core consumer price index rose in March to 5.6%. If the next inflation release reflects a decrease in core inflation, hawkish expectations regarding the Fed's further actions (after the May meeting) will significantly weaken. Therefore, Waller's words about several rate hikes should not be taken as a guide to action - in fact, much will depend on the further dynamics of US inflation.

China macro data returned risk appetite

The pair's growth was also due to another fundamental factor. Reports on the growth of the Chinese economy, which mostly turned out to be better than estimates.

China's GDP volume in the first quarter of this year increased by 4.5% in annual terms, with a growth forecast of 4.0%. At the same time, a growth of 2.9% was recorded in the fourth quarter of last year. Retail sales increased by 10.6% YoY, with a forecast of 7.5% (from the beginning of the year to March - 5.8%, with a forecast of 3.7%). The volume of industrial production grew by 3.9% (previous value - 2.7%).

In general, China's GDP grew due to increased household spending and growth in production activity amid the cancellation of COVID-19 measures. I should remind you that in December, Beijing abruptly canceled most quarantine restrictions and eased pressure against tech companies. As they say, "the result did not take long."

Amid the recovery of the world's largest economy, the safe-haven dollar came under pressure as interest in risk assets increased in the markets.

Nevertheless, at the time of writing, EUR/USD bulls still could not return to the area of the 10th figure. The interest in risk supported the euro, but weak indices from the ZEW Institute acted as a kind of counterweight. In particular, the German business sentiment index in April stood at 4.1 (with a forecast of growth to 15.5). The downward dynamics are recorded for the second consecutive month. The pan-European business sentiment index from the ZEW Institute was also in the "red," standing at 6.4, with a forecast of growth to 12 points.

Commenting on the April decline, representatives of the institute noted that high inflation rates and restrictive monetary policy are putting pressure on the euro area's economy.

Conclusions

Thanks to the increased interest in risk, bulls took the initiative, but they could not enter the area of the 10th figure. Partly due to the unexpectedly weak report from the ZEW Institute. The hawkish signal from Waller provided momentary support for the dollar, but no more. According to the CME FedWatch Tool data, traders still doubt that the Fed will decide on another rate hike after the May meeting (meanwhile, the market does not rule out a rate cut in the second half of the year if the US economy slides into a recession).

The current fundamental background still does not favor the development of a bearish movement, but long positions in the EUR/USD pair are also risky – at least until bulls consolidate above the 1.1000 mark (the middle line of the Bollinger Bands indicator, coinciding with the Kijun-sen line on the four-hour chart). If traders overcome this barrier, the next target will be the 1.1100 mark again, which corresponds to the upper line of the Bollinger Bands on the same chart.