The double advantage of the U.S. dollar, coupled with a seasonally strong period for it, makes the bulls' attempts to counterattack in EUR/USD hopeless. No matter how much the euro tries to find its footing, it just can't succeed. The strength of the U.S. economy and the decline in global risk appetite faithfully serve sellers of the major currency pair.
In the first half of the year, investors were preoccupied with discussing the potential for a recession in the U.S. However, their mood abruptly changed in August. Steady high employment growth, unemployment's reluctance to depart from half-century lows, impressive retail sales growth, and accelerating inflation all indicate that a downturn is not imminent. The leading indicator from the Federal Reserve Bank of Atlanta projects a 5–6% growth in U.S. GDP in the third quarter. Too high to leave Treasury bonds in portfolios.
Dynamics of unemployment and estimates of U.S. GDP growth
The rally in the yields of debt obligations has triggered another driver for the strengthening of the U.S. dollar. It is hard to imagine that with rising real rates on debts, the "greenback" would not grow. Especially as the S&P 500 is undergoing a correction process. This is traditionally perceived by investors as a deterioration in global risk appetite and serves as a basis for purchasing safe-haven assets.
Thus, if someone dislikes the factor of American exceptionalism, they can arm themselves with the loss of investor interest in risky assets. Add to this the traditionally strong months of August and September for the USD index, and the bearish picture for EUR/USD begins to look inevitable.
Much can change in the fourth quarter. Further inflation slowdown in the U.S. will bring back market talks about the dovish pivot of the Federal Reserve and thus weaken the dollar. Moreover, the current surge in bond yields, in terms of real GDP and inflation, looks like a temporary spike. It was affected by large-scale Treasury issuance. In July–September alone, the Treasury plans to sell $1 trillion worth of paper at auctions.
Dynamics of GDP, inflation, and bond yields
Nordea forecasts a decline in rates on 10-year U.S. debt to 4% with subsequent stabilization. If so, then after a decrease, EUR/USD will rise. However, negativity from Europe does not allow us to expect a recovery in the upward trend.
The weakness of the currency block's economy has forced the ECB hawks to moderate their rhetoric. While Bloomberg experts still expect the deposit rate to rise to 4%, derivatives do not believe this. It is likely that the monetary tightening cycle is over, putting pressure on EUR/USD.
Technically, on the daily chart of the pair, there is a pullback to the upward trend within the implementation of the Three Indians pattern. The inability of the bulls to hold on to the lower border of the fair value range of 1.0865–1.112 is a sign of their weakness and a reason to increase previously formed shorts in the direction of 1.08.