Today, EUR/USD has broken a one-year low, having breached the level of 1.1664 which had been holding for 5 weeks. Them the currency pair went down towards the 1.16. The greenback derives strength from a variety of factors such as an escalating energy crisis, growing risk-off sentiment, rising yields of US Treasuries, and higher hawkish expectations. In turn, the euro cannot resist the strength of the dollar bulls because the euro has been weighed down by dovish comments of ECB policymakers. As a result, EUR/USD has been extending a losing streak for a few days straight.
Most experts point out that the US currency owes its strength to rising yields of US Treasuries. Let me remind you that a similar situation happened in the spring this year. Back then, the US dollar also grew hot on the heels of 10-year benchmark US Treasuries. In the context of implementing a new fiscal stimulus package, yields of 10-year bonds held firmly above 1.6%. The greenback was holding the upper hand against its major rivals, winning favor with investors. At that time, Joe Biden approved the pandemic relief package worth $1.9 trillion and Americans received their first paychecks of $1,400. The US economy was being pumped up with tons of cash. Such generous financial aid entailed grave consequences. In the summer, headline inflation sharply accelerated amid robust consumer activity and a shortage of some consumer goods.
Meanwhile, the greenback is also following the trajectory of US Treasury yields. However, the market conditions differ markedly from the ones in the spring. In the early 2021, experts assumed cautiously the scenario of QE tapering ahead of time. Back then, a rate hike was out of the question. Both Fed policymakers and most experts believed that monetary policy could be tightened not until 2023. That's why Treasury yields were growing because of high inflation expectations amid a steady economic recovery in the US, but not because of hawkish expectations.
At present, the fundamental picture has changed significantly for the US currency. At the September policy meeting, the Federal Reserve delivered a clear message about QE tapering that would be launched in November. Ahead of the September policy meeting, many analysts were certain that the regulator would delay the start until December, i.e. until the final policy meeting this year due to dismal nonfarm payrolls for August and mixed components of the CPI for August. Nevertheless, the US Fed sent straightforward signals. The central bank also cleared its stance on raising interest rates. According to the policy statement, 9 FOMC members predict the first rate hike in 2022. At the same time, most Fed officials did not rule out three rate hikes in 2023. Moreover, Saint Louise Fed President James Bullard said in an interview to Reuters yesterday that he expects two rate hikes as early as next year.
In other words, the revision of the Fed's forward guidance accounts for the ongoing rise in yields of US Treasuries. Indeed, traders do not rule out a more hawkish course towards tightening monetary policy next year. A few months ago, investors were speculating cautiously on withdrawing stimulus ahead of time because most Fed officials excluded the hawkish scenario. Now this is a basic scenario. Another thing. The question of tapering stimulus is a settled matter, whereas the timeline for rate hikes is still on the Fed's table. Interestingly, the regulator is bringing forward the time line closer and closer. In the early 2021, the FOMC members said that the first rate hike could be implemented not until 2023. Besides, the Fed's doves were in favor of a more distant take hike in 2024. At present, some FOMC officials admit that monetary policy could be tightened next year.
The rally in the oil market cements interest in the US dollar. Inflated oil prices could trigger another inflation surge in the US with logical consequences. Speaking at Congress yesterday, Jerome Powell said that ongoing inflation acceleration is a serious cause for concern. Back to the oil market, following a minor technical correction, Brent crude again is heading for $80 a barrel, the highest level in three years. Some experts, including analysts at Goldman Sachs, oi prices are set to extend a rapid rally until the year end. Brent in particular might leap to $90 a barrel in late 2021.
Energy investors are certain that OPEC and its allies won't be able to ramp up oil production rates promptly in an effort to meet increasing energy demand. By the way, hurricane Ida crippled the Southeast part of the US. Moreover, a fire on a pipeline in the Mexican Gulf is also to blame for sparse oil supplies. These factors are pushing oil prices up. Such developments in the oil market are bullish for the US currency which, in turn, is hitting multi-month highs. So, the greenback is holding the upper hand both against the euro and in other currency pairs.
All in all, EUR/USD maintains bearish momentum. The bears broke the support level of 1.1640 (the lower border of the Bollinger Bands on the daily chart), heading for the round level of 1.1600. The key support is seen at 1.1540 that is also the medium-term downward target. This is also the lower border of the Bollinger bands on the weekly chart which coincides with the lower border of the Kumo cloud. However, it makes sense to enter the market with short positions after the sellers breach the psychologically important level of 1.1600.