EUR advanced against USD last week after a lengthy downtrend. Currently, the euro is trying to extend its upside momentum.
The European currency rallied despite bleak outlooks forecasting a parity between EUR and USD. After a lengthy period of losses, the euro stood its ground. The US dollar slid down early on Monday, May 23, continuing last week's downward movement. EUR/USD was trading at 1.0605, successfully surpassing the key psychological area of 1.0600.
Market players are now less bullish on USD following the Fed's interest rate hike, which contributed to last week's decline of the US currency. Over the past two weeks, traders increasingly opened both long and short positions in USD. US dollar positioning reached a 4-month high, and net longs in USD rose to the highest level since September 2019. If this trend continues, it will boost the US dollar, analysts say. Investors have also opened short positions in USD, with some expecting a long period of correction.
Rising risk appetite has also pushed USD down against many major currencies, particularly EUR. However, the risk sentiment in the market could be short-lived, analysts say. Many investors remain cautious amid recession fears, inflationary risks, and monetary tightening by major central banks.
The Fed's interest rate hike has put pressure on the global stock market. Rising prices of basic foodstuffs and increased utility bills have undermined consumer activity. The global financial crisis, which was triggered by the COVID-19 pandemic and exacerbated by the war in Ukraine, has made excessive debt burden unsustainable.
In this situation, the US regulator has once again launched its tightening cycle by increasing the key interest rate to 1.0% from 0.25%. The Federal Reserve is unlikely to stop there. To quell galloping inflation, the Fed is about to launch the most aggressive rate hike in its history. Fed policymakers see it as a key tool for reducing inflation to the target level of 2%. The US central bank is committed to achieving that goal, which requires it to follow a hawkish course.
This situation could be detrimental to EUR in the medium term, analysts say. The euro has approached parity with the US dollar for the first time in 20 years, as the EU currency's stability and position in the international market steadily eroded. According to the New York Times, the euro's weakness reflects the darkening outlook of the bloc's economy. HSBC analysts see EUR reach parity with USD at the end of 2022 and fall even lower early next year.