- Shanghai's "freedom day" and JP Morgan's optimism have sparked a relief rally, adverse for the dollar.
- US data and tough Fed talk on inflation could trigger fresh demand for the greenback.
- EUR/USD seems especially vulnerable to a shift in the mood.
EUR/USD and other short-term assets are short-term bullish, then bearish. My colleague Tomàs Salles will tackle the technical patterns emerging, and I will focus on the fundamentals.
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Reasons for the recovery
First, China announced that the six-week lockdown in Shanghai will end after the city reported three consecutive days without community infections. The city is the country's largest and the most important one economically. A significant chunk of the recent market gloom came from the downturn in Chinese consumption – and production – due to lockdowns. Any easing is risk-on, adverse for the dollar. The news is different from that on Monday – weak Chinese figures.
The second positive note is also a positive one contradicting a negative one. On Monday, the financial media discussed Lloyd Blankfein's comments that a US recession is a "very high risk." He used to run Goldman Sachs. On "Turnaround Tuesday" the focus is on a note from JP Morgan, another prominent US bank, which said that markets have gone too far in pricing a recession. Once again, this is good for stocks and negative for the dollar.
Fear of the Fed to return
However, the news from Shanghai does not mean the troubles are over for China, Russia's war in Ukraine continues raging and the Federal Reserve is still tightening. Jerome Powell, Chair of the Fed, will be speaking late in the day and he could remind markets of his aggressive stance – and for good reasons.
Before Powell takes the stage, US Retail Sales figures are set to show consumers continue buying, despite rising prices. Adding to inflationary pressures, the Fed will have received good reasons to increase borrowing costs aggressively, which is positive for the dollar.
EUR/USD as an example
EUR/USD has made significant headway, retracing most of the losses from 1.0470 to 1.0350. It may attempt to attack 1.0470, and even move toward 1.0495, the next cap. However, while the 4h-RSI is making its way above 50, momentum remains to the downside and the pair still trades below the 50-SMA, which hits the price at around 1.0490.
If EUR/USD fails to break higher, it could turn back down toward 1.0440, 1.0425 and 1.04. As mentioned, My colleague Tomàs Salles will provide deeper technical insights.
Overall, there are good reasons for recovery – but also good reasons to see it as short-lived.
