FX.co ★ Dollar gains momentum, and the EUR/USD pair has yet to find a low, as Fed officials hint that the central bank seems to be moving away from monetary stimulus

The greenback cheerfully started the new week.

On Monday, the US currency not only managed to maintain its previously won positions, but also continued its attack against its main competitors, including the euro.

Following the results of yesterday's trading, the USD index rose for the second day in a row, adding almost 0.2% in weight.

The day before, the dollar strengthened due to the receipt of new evidence of the rapid recovery of the US labor market – the main condition for the Federal Reserve to begin normalizing monetary policy.

The number of vacancies in the United States jumped by 590,000, to a record 10.1 million, the country's Labor Ministry said on Monday.

These data came out after the publication on Friday of the monthly report on US employment, which showed that in July employers hired the largest number of workers in almost a year and continued to raise wages, and also prepared the ground for discussing the possibility of reducing the volume of assets being repurchased by the US central bank.

The annual Fed symposium will be held in Jackson Hole at the end of August, and many market participants believe that the central bank will announce the possibility of slowing down QE in the near future.

The head of the Federal Reserve Bank of Atlanta, Rafael Bostic, said yesterday that he was considering the fourth quarter to begin a gradual reduction in bond purchases by the Fed, but was ready for earlier steps if the pace of recovery of the national labor market continued.

The president of the Federal Reserve Bank of Boston, Eric Rosengren, in turn, noted that the US central bank should announce in September that in the fall it will begin to reduce its monthly purchases of treasury and mortgage bonds worth $120 billion.

The hawkish comments of the Fed representatives and the prospect of a reduction in asset purchases by the central bank led to a decrease in the value of 10-year US bonds, pushing their yield to three-month highs (around 1.329%), which added fuel to the fire of the dollar's growth.

As a result, the USD index rose above 92.90 points, approaching the July peaks in the area of 93.19.

The greenback is likely to continue to grow, as strong US employment data for July increased confidence that the Fed should announce a reduction in asset purchases by the end of this year, ING analysts said.

"Given that the Fed is slowly moving towards an exit from a super-soft monetary policy, and the attitude to risk is quite fragile, there is reason to believe that the dollar will maintain support this week," they noted.

Further evidence of a likely tightening of monetary conditions in the United States may appear on Wednesday after the release of US inflation data.

Analysts expect that the country's core annual inflation will fall to 4.3% in July after it soared to a three-decade high of 4.5% in June.

Strong inflation data may accelerate the curtailment of the Fed's monetary stimulus measures, which will have a positive impact on the dollar exchange rate.

If the forecasts are justified, will the slowdown in consumer price growth affect the Fed's plans to curtail QE? Probably not. However, this may become an excuse for taking profits on USD.

Meanwhile, the greatest concern is the spread of the COVID-19 delta strain in the United States, which can disrupt any of the Fed's plans. The United States on average registers more than 100,000 new cases of infection per day, which has not been observed since February.

However, even in such conditions, the US currency is able to strengthen as a safe haven asset.

The greenback does not think to slow down yet, which acts as a headwind for its main competitors.

The USD index updated two-week highs around 93 points on Tuesday, and the EUR/USD pair continued to move to annual lows in the area of 1,1704, marked at the end of March.

The dollar is supported by expectations of the Fed's imminent curtailment of the QE policy, as well as concerns about the spread of the coronavirus in the world.

Meanwhile, the data released today on the eurozone did not add optimism to the single currency.

According to ZEW, the index of investor confidence in the German economy fell to 40.4 points this month from 63.3 points recorded in July.

"Expectations have decreased for the third time in a row. This indicates increasing risks for the German economy, such as a possible fourth wave of COVID-19 in the autumn," said ZEW President Achim Wambach.

At the same time, the ZEW index of economic sentiment in the eurozone sank to 42.7 points in August against 61.2 points in the previous month and a preliminary estimate of 55.3 points.

The EUR/USD pair came under sustained pressure after the ECB recently confirmed its ultra-low mood and introduced a symmetrical inflation rate of 2%. At the same time, the Fed is already preparing to normalize policy, ING notes.

"Employment in the US should grow in September, so the dollar will continue to be in demand, and EUR/USD will test the level of 1.1700," the bank's strategists believe.

The bears' next target may be the area of 1.1610-1.1600.

It is assumed that the main currency pair will maintain a negative attitude as long as it remains below the July lows around 1.1750. Further, the support is located in the area of 1.1700–1.1705, where the lows of March are located.

Although a rise above 1.1750 may ease the bearish pressure, EUR/USD is still at risk of continuing to fall as long as it is trading below 1.1830 (the 20-day moving average).