The euro-dollar pair continues its "downward march". There are only a few dozen points left before the parity level, so reaching it may only take a matter of time. Most currency strategists of large banks have no doubt that the EUR/USD bears will be marked at around 1.0000. The main intrigue lies in the future prospects of the pair. In other words, will bears be able to settle in the area of the 99th figure (that is, under the parity line), or will the 1.0000 target become a kind of springboard for a subsequent corrective counteroffensive?
There is no consensus on this in the market, although, according to my observations, most experts doubt the long-term dollar rally. Without disputing the current superiority and dominance of the greenback, they point to some signals that are time mines for the dollar.
First of all, take note that the US currency is strengthening mainly due to the strengthening of anti-risk sentiment in the markets. Last week, many problems of a global nature were actualized, which had been gradually smoldering before. For example, the cost of gas in Europe has jumped sharply. At the end of last week, a thousand cubic meters of blue fuel was estimated at $1,950 (a multi-month high). Against this background, electricity prices in Europe have reached the highest level in the entire history of observations, in particular in Germany and France. In addition, due to the surge in the cost of imported energy carriers and the weakening of the manufacturing sector, the German foreign trade balance in May went into negative territory for the first time since 1991 (the deficit amounted to 1 billion euros).
All these fundamental factors can be put together. It was the energy crisis, in my opinion, that hit the single currency the hardest, putting additional pressure on EUR/USD. However, this information impulse may weaken in the near future, if not dry up. The government of Canada announced that it has agreed to make an exception to the sanctions against Russia and send to Germany a turbine that has undergone maintenance, necessary for the Nord Stream-1 gas pipeline. Moreover, the United States publicly supported this decision, which, obviously, was agreed with Washington in advance. The result was not long in coming: the price of gas in Europe fell by 12% during trading on the stock exchange. The cost of the August futures at the TTF hub in the Netherlands decreased to $1,620 per one thousand cubic meters. Let me remind you that on Friday the price literally reached the level of 1,950 dollars. We can assume that in the medium term, panic about the aggravation of the energy crisis in Europe will decrease.
Another locomotive of the strengthening of the US currency is the Federal Reserve. Fed members are ready to raise interest rates at an aggressive pace, even at the cost of a possible recession. Fed Chairman Jerome Powell has repeatedly stated that the fight against high inflation is the number one task for the US central bank (for which, by the way, he was criticized in Congress by Democratic senators). Over the past two weeks, many Fed representatives have already publicly supported the idea of raising the rate at the July meeting by 75 points. In general, if we talk about the pace and expected timing of monetary policy tightening, then the Fed retains a leading position relative to other central banks, including the European Central Bank.
But there is a "but" here too. The rate of interest rate hike will depend on the dynamics of inflationary growth. If inflation shows signs of slowing down, then the Fed may moderate its ardor. And the first signals in this regard are already there – the latest report on the growth of the basic price index of personal consumption expenditures in the United States (PCE) disappointed dollar bulls. The release reflected a slowdown in the growth of this most important inflation indicator for the Fed. Moreover, the downward dynamics on an annualized basis has been recorded for the third consecutive month.
In this context, the key role (at least in the medium term) will be played by the consumer price index, the June figures of which will be published on Wednesday. If it also fails dollar bulls, the EUR/USD pair is unlikely to be able to stay below the 1.0000 target, even if it temporarily falls below the parity level.
If we talk about the "allies" of the greenback, it is impossible not to recall the coronavirus, which also strengthens the anti-risk sentiment in the markets. Indeed, there is an outbreak of COVID-19 in many European countries due to a mutation of the Omicron strain. But the European Union does not pursue a zero tolerance policy (unlike China), so far EU officials only advise promoting a booster dose of the vaccine. Let me remind you that most states in the European region have abolished almost all coronavirus restrictions introduced back in 2020. And apparently, the authorities are in no hurry to return to lockdowns.
Thus, the US dollar is currently in high demand quite reasonably, given the prevailing fundamental picture (the growth of anti-risk sentiment, the hawkish attitude of the Fed, the outbreak of coronavirus, the threat of recession). But if we talk about long-term prospects, the picture is not so clear. This may indicate that it will be difficult for EUR/USD bears to stay below the parity level. Therefore, it is necessary to approach short positions with great caution. In my opinion, it is now advisable to consider shorts only on impressive corrective pullbacks (an example of this is Friday's correction). Decline targets are 1.0100, 1.0050, 1.0030.