Buyers of EUR/USD were unable to return to the 19 figure area, after which sellers regained the initiative.The euro-dollar pair began the trading week with a slight corrective pullback but remained under pressure. Buyers of EUR/USD could not return to the 19 figure area, after which sellers seized the initiative and are now trying to consolidate below the support level of 1.1810 (the lower line of the Bollinger Bands on the H4 timeframe).
Traders are focused on the shutdown, Iran, and the ISM manufacturing index. On Friday, market participants reacted positively to Kevin Warsh's nomination to head the Federal Reserve, playing out the "Warsh factor." However, such fundamental factors generally do not last long, especially since the potential successor (who still needs to be confirmed by the Senate) to Jerome Powell holds dovish views, advocating for significant interest rate cuts. Therefore, on Monday, traders have shifted their attention to other fundamental factors.
Another shutdown has begun in the United States. However, the market has reacted quite calmly to this news, as the situation differs significantly from last year. The reality is that this year, there has essentially been a technical delay. The White House and the Democrats reached a compromise last week, agreeing to fund all federal agencies through the end of the fiscal year (except the Department of Homeland Security, whose funding will be extended for only 2 weeks). However, the compromise bill has only been voted on by senators - members of the lower house of Congress ran out of time to do so.
According to The Hill, the House Rules Committee will consider the bill on Monday. Voting on the debate procedure for discussing the bill is set to take place on Tuesday (February 3), immediately followed by the final vote. If all these procedural steps go "without a hitch" (which is quite likely), then the partial shutdown will conclude by Wednesday.
Therefore, the market has calmly received the news of the ongoing shutdown - volatility (not in favor of the dollar) is expected only if the lower house of Congress fails to vote on the bill. This is a highly unlikely scenario, but it cannot be ruled out entirely.
The situation with Iran is also in limbo. On one hand, Trump continues to voice belligerent statements towards Tehran while the Pentagon is gathering an aircraft carrier strike group, forward fighter aviation regiments, and air defense systems in the region.
On the other hand, Iranian President Pezeshkian has ordered negotiations with the United States to begin today. According to Iranian media, negotiations may take place in Turkey "in the coming days." Moreover, on Sunday, Pezeshkian stated that Tehran prefers diplomacy to war, but "cannot be forced into negotiations through threats or coercion."
It is unknown how events will unfold. The intrigue remains, meaning the scales could tip either way, thereby affecting the greenback.
The ISM manufacturing index released on Monday unequivocally favored the American currency. Over the past three months, it has shown a downward trend, falling to 47.9. Since March of last year, the index has remained below the 50-point mark. According to preliminary forecasts, it was expected to rise slightly in January (to 48.5) but remain in contraction territory. However, the actual result exceeded even the most optimistic expectations: the ISM manufacturing index entered the expansion zone, rising to 52.4. This is the strongest result since September 2022. The sub-indices also showed positive dynamics - in particular, the new orders component surged (almost to a four-year high), as did the production component.
Overall, the January result clearly indicates a turnaround toward growth in industrial activity in the U.S. after a prolonged period of decline. This is a positive signal for the greenback, as it reduces the likelihood of a rate cut in the foreseeable future, at least in the context of the next two meetings (March, April).
Thus, the scales have again tipped in favor of the American currency. The greenback is back on top. If the shutdown concludes "on time" (i.e., on Tuesday) and events around Iran unfold in a de-escalation scenario, the dollar will see increased demand, exerting upward pressure on EUR/USD. This is the most likely scenario given the current information backdrop.
From a technical standpoint, the pair has overcome the intermediate support level of 1.1830 (the Kijun-sen line on D1) and is currently testing the support level of 1.1810 (the lower line of the Bollinger Bands on H4). If it breaks this level, the next target for the downward movement will be the 1.1740 mark (the middle line of the Bollinger Bands on the daily chart).
