FX.co ★ Euro and US dollar's main concern is to reach new highs

The price highs that the euro reached last Friday are not the limit for it. It aims to break through new barriers. At the same time, the US dollar is set up in a similar way, which is waiting for the Fed's help.

The Euro currency started the new week with the high reached over the past three weeks, but there is one problem – a small correction. Last Friday, the single currency approached a three-week high and is trying to hold on to its gained positions. The reason for the surge was a hawkish reversal in ECB policy. However, experts believe that the euro's further growth is unlikely amid the impending tightening of the Fed's monetary policy. In such a situation, the US dollar will take the lead. Analysts are sure that the US currency will need the Fed's tightening of monetary policy to further rise.

Experts believe that the EUR/USD pair is in for serious changes. The first step along this path was the change in ECB's monetary policy. Earlier, the European regulator confidently defended its position, planning to maintain the current interest rate until the end of 2022. However, the situation has changed dramatically now as the ECB revised its strategy during its last meeting. According to analysts, the regulator will update the previous inflation forecast and abandon the current dovish position at the March meeting. Experts allow similar actions by the ECB following the results of the June meeting.

The current situation contributed to the euro's sharp growth across the entire market. The US dollar followed suit, although its results were more modest. Against the backdrop of impressive US macroeconomic data, the market's expectations regarding the tightening of the monetary policy have intensified. Analysts said that the Fed can immediately raise the rate by 50 basis points (bp) next month. In such a situation, the US currency will get a head start and can bypass the euro.

The general upswing that swept the markets contributed to the growth of the EUR/USD pair. At the end of last week, the pair was steadily gaining momentum. Its vector is still directed up, despite the short-term decline. On Monday morning, the EUR/USD pair was around the level of 1.1432. Some instability was caused by the euro's downward correction, recorded after a 2% increase against the US dollar.

The US currency is gaining momentum amid a noticeable strengthening of the US labor market and the upcoming Fed rate hike. The sharp rise in the euro did not prevent the dollar from strengthening its position and adding 0.4%. According to experts, the US dollar's growth will continue soon.

According to the US Department of Labor report, the US labor market has risen. The increase in jobs in the country last year amounted to 467 thousand against the projected 150 thousand. The data for December 2021 was also revised upwards. As a result, the increase in the number of employees amounted to 510 thousand against the previously forecasted 211 thousand.

The publication of impressive data contributed to the growth of market expectations regarding the Fed rate hike by 50 bps at once in March. In such a situation, the US dollar will sharply increase, although experts fear a negative impact on it from the debt market. It can be recalled that the EUR/USD pair collapsed to 1.1411 after the release of reports on the US labor market, and then returned to 1.1450. According to preliminary estimates, the pair will stabilize "sideways" from the range of 1.1400 - 1.1600 in the upcoming weeks.

The market's paradoxical reaction to the impressive US data confused experts. Experts explain this by the difficult situation that has developed in the American debt market. The increased expectation of tightening the monetary policy brought down the price of state bonds. The untwisted spring of these expectations hit the yield of 10-year bonds. As a result, their cost soared to 1.93%, updating the high since December 2019. At the same time, analysts are sure that the US Treasury will not allow the collapse of the USD and the debt market. The agency needs to place an additional $350 billion to maintain the balance in the system and stabilize the US dollar.