The next trading week was marked by the strengthening of the US currency. The greenback strengthened its positions in almost all dollar pairs of the "major group". Perhaps the only exception here is the dollar-franc pair, which collapsed by 400 points due to the Swiss National Bank's decision to increase the interest rate for the first time in 15 years. The greenback maintained its advantage in all other dollar pairs – to one extent or another.
If we talk directly about the euro-dollar pair, then the advantage of the US currency was not so pronounced here. The bears were able to return to the area of 5-year lows (1.0360), but at the same time they could not approach the "red line" again, which separates the area of five-year lows from 20-year lows. We are talking about the 1.0339 mark, which was last reached in 2017. The price was below this target only in 2002. If we roll back the time to the beginning of the "zero", then we will see not only parity, but also such marks as 0.83-0.85.
To date, they have started talking about parity again – but rather cautiously and with great reservations. Let me remind you that at the beginning of May, bears tried to overcome the key price line in order to go to the base of the third figure and claim the area of 1.0250-1.0320 (with a claim to parity). But after reaching 1.0349, traders recorded a profit – they did not dare to storm the five-year price low. After that, bulls seized the initiative and tried to develop a large-scale correction. Admittedly, they did it: after the April inflation data (which reflected a slowdown in CPI and PCE growth), the dollar weakened throughout the market, allowing greenback opponents to regain lost positions. At the Federal Reserve's May meeting, Committee members even discussed a possible pause in the process of tightening monetary policy after the September rate hike. Representatives of the European Central Bank – on the contrary – finally announced two rounds of rate hikes. In addition, the risk appetite on the market increased significantly after US President Joe Biden admitted the possibility of partial cancellation of anti-Chinese import duties (however, these words remained words, but at that time the US stock market reacted quite violently). Due to the combination of all the aforementioned fundamental factors, the EUR/USD pair rose by 400 points in May, but stalled around the resistance level of 1.0760. After several unsuccessful attempts to approach the 8th figure, bulls gave up: a large-scale corrective pullback was completed.
Over the past two weeks, the dollar has been actively returning lost points. By and large, the greenback "returned to the game" only thanks to US inflation. Although the EUR/USD pair began to decline even before the May report was released – on the strengthening of the oil market. But the rise in the price of oil can also be viewed through the prism of inflationary processes, given the fact that energy prices "push" the CPI up.
After the release of the May data on the growth of inflation in the United States, it became clear that now the Fed is forced to choose between two scenarios: hawkish and "ultra-hawkish". Conversations about a possible pause have completely lost their relevance. Therefore, the EUR/USD pair was actively declining ahead of the Fed meeting, and after the announcement of the results of the June meeting, it collapsed to the 1.0360 mark. As you know, the US central bank decided to raise the rate by 75 points at once, at the same time stating that there will be a choice between a 50 and 75-point hike in July. Everything will depend on the dynamics of inflation.
It would seem that the bears of EUR/USD had "all the cards in their hands" for the development of the downward trend. But the problem is that the bears were already too close to the aforementioned 1.0340 support level. Market participants decided not to take risks – they closed short positions. The dollar has become a victim of the trading principle "buy on rumors, sell on facts". This explains the corrective pullback of the price after the June Fed meeting. All the fundamental factors in favor of the greenback were played out in advance (during the three trading days before the meeting, the EUR/USD pair decreased by 350 points), while the fact of a 75-point rate hike did not help the bears approach (and even more so overcome) the support level of 1.0340.
However, the corrective surge of Thursday-Friday was of a short-term nature. At the end of the trading week, the pair returned to the area of the fourth figure, once again reminding traders of the riskiness of longs in the circumstances. Abstracting from the first emotional trading decisions, we can come to an unambiguous conclusion: the dollar received significant support from the Fed last week. After all, it is obvious that the Fed will fight high inflation even at the cost of a possible recession. While the ECB will act much more cautiously, prudently, and, apparently, much more slowly. The Fed and the ECB are moving away from each other again in the context of the pace of monetary policy tightening – and this factor will play a dominant role in determining the downward trend of EUR/USD.
On Friday, Fed Chairman Jerome Powell spoke at an economic forum dedicated to the dollar's role in the global economy. He again repeated the theses that were announced at the end of the June meeting. In particular, he said that the members of the central bank (including him) clearly aim to return inflation to the target two percent indicator. And although Powell voiced quite general and vague phrases, this was enough for the EUR/USD bears to pull the price to the base of the fourth figure. This suggests that traders did not fully win back the hawkish results of the June meeting. In this context, it should be noted that next week Powell will speak in the Senate with a semi-annual report. And if there he allows the option of a 75-point rate hike at the July and possibly September meetings (which is very likely), EUR/USD bears will receive an important information trump card to test the key support level of 1.0340.
In general, it is advisable to use any upward pullbacks on the pair to open short positions: thanks to US inflation and the Fed, the dollar has "returned to the big game" – including paired with the euro.