FX.co ★ Bears on EUR/USD are retreating, but the powder is left dry

On Wednesday, the greenback was forced to extend a three-day series of losses, pulling back even more from the 3.5-month highs recorded last week.

Pressure on the protective dollar was exerted by an increase in risk appetite amid reports that the Chinese securities regulator has made some efforts to calm the situation on the stock markets.

According to CNBC, China will continue to allow local companies to list in the United States.

The fact that a bipartisan group of US senators reached an agreement on a $1 trillion infrastructure bill also contributed to the improvement of market sentiment. Although this bill still needs to pass several instances, the additional expenses of America are positive news for the whole world.

Meanwhile, in the US debt market, the yield curve has become slightly flatter, indicating expectations of a more measured normalization of monetary policy by the Fed. Formally, this is a reason for the growth of stock indices and the weakening of the US currency.

After another unsuccessful attempt to storm the 93 mark, which took place at the end of last week, the greenback moved to correction. If it develops, the next targets for the USD index will be around 91, which corresponds to the range of 1.2000–1.2100 for the EUR/USD pair.

The main currency pair reached two-week highs due to the fact that the publication of the decision of the US central bank on monetary policy and the comments of its Chairman Jerome Powell launched a sell-off of the dollar against most major currencies.

The text of the final statement of the Federal Reserve has undergone some changes. The central bank excluded from it the phrase "about vaccination slowing the spread of COVID-19 in the United States", as well as the word "significantly" from the sentence about "economic prospects" that continue to "depend on the rate of spread of the virus".

A less pessimistic forecast of the central bank should have supported the dollar, but Powell and his colleagues did not let this happen.

Although the head of the Fed said that the US economy has made some progress, much remains to be done.

He also noted that the increase in inflation in the United States is a temporary phenomenon, and millions of Americans have not yet returned to work.

The Fed has already announced that it is discussing the curtailment of QE, but the adoption of specific decisions on this issue should wait for now.

As an initial reaction, the USD index jumped from 92.50 to 92.70 points, but then quickly turned down, being under steady pressure.

Will the dollar decline continue? Investors may receive the next signals from the Fed not earlier than the end of August at a symposium in Jackson Hole. Up to this point, the weakening of the US currency may be very pronounced.

The fact that the Fed's "printing press" is still working at full capacity plays into the hands of USD bears, forming the prerequisites for its rollback to the lower limit of the current trading range around 89.60.

Given the uncertainty brought by the outbreaks of the COVID-19 delta variant in the United States and abroad, FOMC officials will closely monitor the situation and may decide to adjust the signals to the markets at the next meeting.

If the US authorities do not close the country for another lockdown, the Fed will continue to discuss the possibility of curtailing QE.

"Yesterday, the Fed did not provide any new information to the markets. Now new hopes will be pinned on the annual economic symposium in Jackson Hole, which will be held from August 26 to 28. The central bank traditionally uses this platform to notify the markets about upcoming changes in monetary policy," Goldman Sachs analysts said.

"If there is no news in August, then the last meetings of the central bank this year will remain in the queue. They are scheduled for September 21-22, November 2-3 and December 14-15. At the same time, the central bank will present updated economic forecasts in September," they added.

At the moment, the futures market fully includes in the quotes the possibility of raising the federal funds rate by 25 basis points by March 2023.

"We still believe it is likely that the decision to reduce the volume of asset purchases by the Fed will be made in September, with an official slowdown in purchases starting from December and beyond. We expect that the central bank will be able to complete the reduction of QE by the summer of 2022," Nordea analysts noted.

If the US central bank publishes the details of the reduction of the quantitative easing program in the fall, this will have a positive impact on the yield of treasuries, which in turn will lead to an increase in the attractiveness and strengthening of the dollar, including against the euro.

Once again, over the past twelve months, the EUR/USD pair has received support on the decline in the area of 1.1600–1.1700. The development of this movement opens the way for the pair to 1.2200–1.2300 (the area of this year's highs).

At the same time, it should be remembered that the foreign exchange market is not a one–way street.

The euro is unlikely to show significant success due to the cautious tone of the Fed, which sounded at the end of the July meeting of the monetary policy on Wednesday, according to ING.

"The dollar weakened after the Fed meeting, pushing the EUR/USD pair up. However, the euro will lag behind among the G10 currencies along with other low-yielding currencies with dovish central banks, including the Japanese yen and the Swiss franc, " the bank's analysts noted.

"This will be due to the fact that the Fed will eventually outpace the ECB in normalizing monetary policy, especially next year, when it will completely stop quantitative easing and start raising interest rates," they added.

This week, ECB representative Robert Holzmann said that the central bank will discuss its monetary policy and forecasts in September.

According to him, there is too much uncertainty for making policy decisions now.

"A lot will depend on what picture the economic reports on the eurozone will show in the coming weeks. However, it is much more important how the viral situation in the region will develop against the background of the spread of the delta variant. If the ECB does not give explanations on policy in September, it will have to report something no later than December," Holzmann said.

"The last ECB meeting did not bring any surprises. It only confirmed our opinion that the regulator's policy will remain highly accommodative for some time against the background of long-term problems associated with the pandemic. The ECB's dovish attitude suggests that a reduction in monthly asset purchases in 2022 is now less likely than before, " UOB strategists noted.

So far, the EUR/USD pair is benefiting from an improvement in risk appetite and a weakening of the dollar on a broad front. It has been showing growth for the fourth consecutive session. On Thursday, the pair confidently broke through the 100-day moving average and is now flirting with the 200-day moving average, which passes just above 1.1865.

The next resistance is marked at 1.1880 (the barrier that restrained the pair's growth in mid-July), and then at 1.1900 and 1.1945.

Support passes at 1.1840, 1.1820, 1.1770 and 1.1750.