27.12.202223:49 Forex Analysis & Reviews: EUR/USD. China opens the door: risk appetite grows in the market

Risk appetite is rising in the market amid reports that China is abandoning its "zero-Covid" policy. It is noteworthy that during the weekend, many reputable news agencies (Reuters, Bloomberg, AFP) painted dreadful pictures, referring to their anonymous sources. Tens and even hundreds of millions of infected, overcrowded morgues and overloaded medical systems in China: such an information background created by the press provided indirect support to dollar bulls.

However, this support was too elusive. The fact is that the market is quite pragmatic (and even in a sense cynical) about the spread of coronavirus - including in China. Traders are primarily concerned about the reaction of the authorities (quarantine restrictions, lockdowns, disruption of logistics chains, etc.) and the possible economic consequences of the COVID surge. While the increase in the number of infected people does not greatly alarm market participants: it serves only as a kind of barometer, increasing or decreasing the likelihood of pessimistic scenarios.

That's why amid such events unfolding in China (according to the journalists of the aforementioned news agencies), the greenback suddenly found itself under pressure: the US dollar index returned to the area of the 103rd figure, where it drifted.

The fact is that China does not officially acknowledge nor denies the information about the unprecedented growth of the number of cases in the country. The real number (the daily increase in cases and deaths from coronavirus) is unknown, as officials have stopped releasing data on new cases. Last week, China reported 4,000 new COVID-19 diseases daily and only a few deaths.

If we believe the insiders, in reality these figures can be significantly underestimated, but - I repeat - in the context of the currency market what matters is the reaction of Beijing to the current situation. For example, when the Chinese authorities were closing the 26-million-strong Shanghai city due to several dozen COVID cases, a tiny outbreak of coronavirus was the focus of traders' attention because of its large-scale consequences. But when Chinese authorities eased quarantine restrictions on a million-strong COVID outbreak (in this case it does not matter whether this is true or the information is exaggerated), then the scale of another wave of the pandemic has no "practical significance" for the foreign exchange market.

This is why traders focus on official reports from Beijing rather than insider information from news agencies. And that is why the market's appetite for risk is growing, despite the published reports (unofficial) from the frontline medical front of the PRC.

The National Health Commission of China yesterday announced that starting January 8, 2023, mandatory quarantine requirements due to the COVID-19 pandemic will be eliminated for inbound passengers. All "green codes" for inbound and all quarantines for inbound passengers will be eliminated. In addition, starting next January, the number of international flights will no longer be restricted, and land borders and crossings will be reopened.

Such steps (especially amid a likely increase in the number of coronavirus cases) were interpreted by the market very unambiguously - according to most experts, China is ready to abandon its "zero-Covid" policy, the implementation of which had an extremely negative impact not only on the PRC economy, but also on the global economy.

A significant report published on Friday also weighed on the dollar. The core PCE index slowed to 4.6% y/y (a downtrend was recorded for the second month). This is a crucial inflation indicator for the Federal Reserve, the slowdown of which has reinforced expectations that the US central bank may ease its aggressive tightening of monetary policy in the first half of next year. Some Fed members remain aggressive, though. For example, John Williams, head of the Federal Reserve Bank of New York, said last week that the U.S. consumer price growth rate is "stubbornly high". He added that the central bank would raise the rate as high as necessary to get inflation under control. According to Williams, who has a permanent vote on the Open Market Committee, inflation in the United States has begun to ease, but a much more significant slowdown is necessary for the Fed to soften its stance on the need to tighten policy.

As you can see, the fundamental picture for the EUR/USD pair is very contradictory. In my opinion, traders will continue to be cautious (until the end of the holidays), reacting reflexively to the current information flow. But at the same time, they are unlikely to decide to leave the established price range. This means that the EUR/USD pair will continue to trade in the 1.0550-1.0660 range, alternately starting from its limits.