Both the US dollar and the single European currency were sensitive to the latest policy decisions of the Federal Reserve and the ECB. Both regulators raised their key interest rates. Even though some specifics of their monetary policies differ, the centerpiece remains the same. They endeavor to fight against stubborn inflation. For this purpose, they apply aggressive monetary tightening, leaving some room for leverage. Both the US Fed and the ECB are facing a dilemma: to proceed with the ongoing policy or give up.
After the meetings of the American and European regulators, the EUR/USD pair came under serious volatility. At first, the US dollar turned out to be the winner, and then the euro took the reins. At present, the euro again had to give way to the greenback's leadership.
Last week after the Fed meeting, the EUR/USD pair went up sharply. However, later, according to the technical chart, the instrument plunged by 200 pips instantly. This took the market by surprise, but then the situation stabilized.
Such price movements indicate that in the near future, the instrument is set to collapse, and not only to the level of 1.0000 but also below. According to analysts, this is not about a short-term downtrend of 1000 pips within the range of 1.0000-1.1000. They warn about a large-scale bear trend in the EUR/USD pair. At the same time, experts allow a return to fairly high levels for a short while.
On the first day of the last summer month, on Tuesday, August 1, the EUR/USD pair made a pullback to the level of 1.0979. Earlier, the instrument rose to 1.1025–1.1030 but then lost some ground.
According to preliminary short- and medium-term forecasts, the EUR/USD pair is likely to extend its decline. So, the currency pair will approach 1.0200 in the next two months. As for the outlook for 7-8 months, analysts expect EUR/USD to pull back to 0.9000. According to experts, a similar situation occurred in the United States before the dot-com crisis.
In these circumstances, EUR weakened against USD after the publication of reports on GDP and inflation in the Eurozone. A day earlier, on Monday, the euro rose in value against the greenback, but this rise was short-lived. At the moment, the greenback is setting the tone EUR/USD, while the euro has slightly decreased.
According to preliminary estimates by Eurostat, the total GDP of the eurozone increased in annual terms by 0.6% (0.1% stronger than the consensus of the 0.5% growth) in the second quarter of 2023. On a quarterly basis, the economy expanded by 0.3%, although it was projected to increase by 0.2%. In the first quarter, GDP growth in the eurozone was recorded at 1.1% year-on-year, experts remind.
As for the annual inflation in the Eurozone, it slowed down to 5.3% in July from 5.5% last month. This was in line with analysts' expectations. According to experts, this is the lowest inflation rate since January 2022, which is in line with the main forecasts.
The focus of attention of market participants is the revised index of business activity in the eurozone's industry. According to flash estimates, the manufacturing PMI fell to 42.7 points in July from 43.4 points in June. Later, Eurostat will publish data on unemployment in the EU, which, according to experts, remained at the May level of 6.5% in June.
According to experts, the dynamics of inflation and GDP of the European block, which exceeded expectations, play into the hands of the euro and undermine the position of the USD. Besides, following the results of the ECB press conference, the single currency recovered notably after the sell-off last Thursday, July 28. Analysts reckon that inflationary trends in Europe are more stable than in the US. In such a situation, unlike the Fed, the ECB will need to either venture into another rate hike or keep the refinancing rate at the current level for as long as possible.
Currently, the European regulator is following the steps of its American counterpart. This creates some tension in the market, although the overall situation is stable. According to currency strategists at Commerzbank, the same monetary policy, but carried out under different conditions, entails different consequences for the economy and for the EUR/USD pair.
The current similarity of monetary policies can lead to unpredictable results. "If the ECB continues to follow the Fed to some extent in its monetary policy, this will not lead to the fact that the EUR/USD pair will receive a new impetus. However, in the medium term, the forecasts for the EUR/USD pair are one way or another due to different approaches from the Fed and the ECB," the bank emphasizes.
Experts say that in the near future, the Fed will have to cut interest rates, but the ECB will keep them "at elevated levels." This will have a positive impact on the euro in the short and medium term, Commerzbank predicts.
However, for the US dollar, the current financial situation remains tense. During the year, the greenback showed high volatility, and last month, short positions in USD fell to a minimum over the past two years. At the same time, many global fund managers are convinced that the US currency is overvalued.
Key to the reassessment of the global role of the dollar is the current monetary policy and ever-increasing inflation. According to Reuters analyst and columnist Mike Dolan, US inflation "as measured by the GDP deflator was 2.2%, well below forecasts, and the Fed's preferred PCE inflation rate was also well below consensus at 3.8%".
According to the expert's estimates, recent speculations that the Fed's interest rates have peaked are putting serious pressure on the USD. On the other hand, now and then, market participants discuss a similar situation with the European regulator, although "statements about the peak rates of the ECB are not supported by anything."
In this context, experts assume that both the ECB and the Federal Reserve could terminate in parallel their cycles of monetary policy tightening. At the same time, futures markets note that "the first rate cuts by both central banks are almost synchronized in June-July 2024," Mike Dolan notes. It turns out that the Fed and the ECB are moving in the same direction, in the same team, but the consequences of these actions will be different and hard to predict.