FX.co ★ USD is only slightly off course as the Fed's inflationary bubble has deflated somewhat. The EUR/USD pair is ready to continue to grow, but it risks facing its previous fears again

In July, the greenback reached record values since the beginning of April due to the fact that investors began to rely on the fact that taping in the United States will begin this year.

In the week up to July 27, speculators increased their net long positions in the US currency to the highest since March last year, data from the US Commodity Futures Trading Commission (CFTC), published last Friday, showed.

This happened before the Fed meeting, following which the central bank signaled that it was in no hurry to tighten monetary policy.

As a result, the dollar fell by almost 1% last week. However, then the rate of decline in the USD slowed down.

Continuing concerns about the coronavirus continuing to spread in the world are spurring demand for the dollar as a protective asset, keeping it from a deeper drawdown.

The yield on 10-year treasuries fell to a two-week low of 1.15% on Monday, reflecting concern about the prospects for economic growth in the United States.

"The market is inclined to moderate risk reduction. There is some caution, since the Delta coronavirus strain is spreading in many places, " said strategists at Daiwa Securities.

Although in the United States, the number of hospitalizations due to COVID-19 in Louisiana and Florida has increased to the highest levels since the pandemic, the chief American health expert Anthony Fauci has ruled out another lockdown in the country.

"There is nothing left but to wait and see how the spread of the COVID-19 delta variant in the country will change or not the Fed's political position," State Street analysts said.

The recovery of the US economy continues, despite the increase in the number of people infected with coronavirus in the country, the US central bank said at the end of the July meeting, maintaining an optimistic tone and pointing to the ongoing discussions about curtailing bond purchases.

Societe Generale analysts predict that the dollar will trade in a narrow range until the Federal Reserve summit in Jackson Hole, where the central bank may signal the timing of the beginning of the curtailment of incentives.

"The greenback has had some very good weeks, so some consolidation is quite expected," they said.

Now investors will be watching for any catalysts that could prompt the Fed to tighten monetary policy as soon as possible.

In this regard, the nearest event risk for the dollar will be the monthly data on US employment, which will be released on Friday.

If the number of jobs created in the US in July exceeds 1 million, then expectations may increase that the Fed will announce the upcoming taping in September.

In this scenario, the greenback will be in demand, however, if the figure turns out to be close to 700,000 or lower, this will push the greenback to fall.

So far, the USD index continues to circle around the 92.00 point mark.

The US report that was published yesterday indicated a slowdown in the growth of activity in the country's manufacturing sector.

This may be a signal that the peak of the recovery in the US economy has already passed, according to National Australia Bank.

"From a historical point of view, the ISM indicator in production at the level of 59.5 points is still a very reliable indicator of activity. Nevertheless, the fall in the yield of treasuries in response to the publication of these data suggests that the debt market is concerned about peak growth and the possibility of further slowdown in the future," NAB analysts said.

The growth of the US economy in the second quarter was 6.5%, which was lower than the market consensus forecast of 8.5%, Wells Fargo notes.

"We believe that overall US GDP growth will remain generally stable in the coming quarters. Consumers are still full of cash, and there is a pent-up demand for spending on services. In addition, the latest monthly data on production orders indicate that business spending on equipment remains stable. These orders will need to be fulfilled in the coming months, " the bank's analysts said.

"At the same time, the recent surge in the number of COVID-19 cases in the United States poses a risk of deterioration in the country's economic prospects. We do not expect that the American economy will stop, as it was a year ago. Nevertheless, consumers can potentially become more cautious about traveling, dining in restaurants, visiting stadiums, etc., if the number of cases of infection increases significantly," they added.

Similar concerns are observed on the other side of the Atlantic. Perhaps that is why the players who bought the EUR/USD pair from 3.5-month lows are not in a hurry to break the 1.1900 mark up yet.

"The eurozone registered GDP growth of 2% in the second quarter after two quarters of contraction. The re-opening of the eurozone economies from the end of the first to the beginning of the second quarter stimulated economic activity," Rabobank analysts said.

They expect that the recovery in the services sector of the currency bloc should be sustained in the coming quarters against the background of an increase in vaccination rates in the region and a concomitant gradual return to normal life.

"At the same time, the main risk in the short term is associated with a very contagious delta variant of the coronavirus, which slows down the gradual abolition of isolation measures and has even forced some European governments to cancel easing and tighten restrictions on international travel," Rabobank warns.

The euro received support at the end of last week from stronger-than-expected data on eurozone GDP and inflation statistics, MUFG strategists point out.

"Evidence of a stronger recovery in the eurozone economy should prompt the ECB to discuss the start of phasing out emergency support measures in the autumn. However, the ECB's dovish policy stance will eventually weaken support for a stronger euro due to evidence of stronger GDP growth and inflation in the eurozone. We expect that the EUR/USD pair will stabilize around the level of 1.2000 by the end of the year," they noted.

After touching the monthly peak at 1.1905 last Friday, the main currency pair somewhat lost its upward momentum and moved into consolidation.

"The initial resistance for EUR/USD is located at 1.1896-1.1897, and then at 1.1910. The area of 1.1945–1.1949 is higher, where the Fibonacci correction level is 38.2% relative to the decline in May–July. This area may turn out to be a tough nut for the bulls and cause the pair to turn down. In case of a successful breakdown, it is possible to recover to 1.1976 (the high at the end of June) and 1.1985 (the 55-day moving average), where growth should be stopped," Credit Suisse analysts said.

"The support is located at 1.1850-1.1840. It must survive to maintain the current upward risks. Its breakdown will weaken the bullish mood and target the bears at 1.1799 and 1.1773–1.1763. A drawdown below 1.1754–1.1752 will reanimate the bearish momentum and target the pair to test the medium-term support line of 1.1703–1.1695," they added.