FX.co ★ Traders should sell EUR/USD. EUR searches for reasons to rise

At the beginning of the week, the US dollar is trying to keep the uptrend, but the attempts are not always successful. Meanwhile, the euro is in a more difficult situation since it cannot find strong reasons to gain in value.

According to the recent reports, last week, the bullish percent index (that is, the ratio of the number of long contracts to the number of short contracts) fell to 4.19 points. At the same time, the US dollar index reflects a rise in bullish sentiment among traders of the US dollar. For the last two weeks, market participants' net profit on the greenback's rise has been lowering. As a result, the indicator hit the lowest level in the month. The strengthening of the current trend contributes to a further decline in the US dollar.

Under the current conditions, most analysts recommend that traders should sell the euro/dollar pair, considering the US dollar to be very cheap compared to the euro. Some analysts once again expect parity, supposing that prices of the euro and the US dollar will become equal this autumn. Currency strategists at Toronto Dominion Bank recommend that traders open short positions on the euro with the target at the parity level. They suppose that it will be better to go short from 1.0345 since in the long-term prospect this strategy will bring a profit. Early on Monday, August 15, the pair was trading at 1.0274, trying to leave the current range.

Experts are emphasizing a number of problems in the eurozone, which continue to exert pressure on the European currency. At the same time, Europe is skillfully resisting the energy crisis. Analysts believe that macroeconomic data published last Friday, on August 12, confirms this. According to the data, in June, the eurozone industrial production increased by 0.7% on a monthly basis. Year over year, the indicator advanced by 2.4% compared to a rise of 1.6%. At the same time, many experts remain pessimistic about the medium- and long-term prospects of the euro. Currency strategists at Commerzbank downwardly revised their previous forecasts. Now, they expect a recession in the eurozone. The bank believes that in December 2022, the European currency will fall to 0.9800 and it will remain in this range until the end of 2023.

Such fluctuations in the euro/dollar pair could be explained by the fact that the US inflation is approaching its peak. Analysts are sure that it is too early to open short positions on the US dollar. Experts believe that it is necessary to get more evidence that inflation is reaching its peak.

Against the backdrop, Richmond Fed President Thomas Barkin announced the necessity of a further rise in the key interest rate to cap growing inflation. He supposes that the regulator will have to take a lot of measures to reach the goal. He believes that the US economy is fundamentally stable and perfectly reacts to the key interest rate hike without violating the labor market conditions. The existing increase in the US inflation is explained by higher commodity prices, supply disruptions, and mounting demand. The Fed should primarily lower inflation and then, it will decide what to do with interest rates. According to preliminary estimates, the benchmark rate could be hiked by 75 basis points at the next meeting.

Earlier, this idea was voiced by President and CEO of the Federal Reserve Bank of San Francisco Mary Daly. She thinks that the regulator will raise the key interest rate by another 75 basis points, following the chosen approach to the monetary policy tightening. According to M. Daly, now the Fed cannot switch to another approach as it will negate all the hard work aimed at capping inflation. The probability that the Fed will raise the benchmark rate by 75 basis points in September equals 42.5%. Meanwhile, the likelihood of a 50-basis-point increase is 57.5%. At the same time, experts at Societe Generale note that against this background, the US dollar is unpredictable.

Notably, the Fed has been raising interest rates for several months already. In June and July, the key interest rate was hiked by 75 basis points to the targeted level of 2.25-2.5%. At the same time, most investors suppose that the interest rates will be raised by 50 basis points. Under the existing conditions, the greenback may slump and then recoup its losses. As for the euro, it is still under pressure. Market sentiment remains positive thanks to the fact that the US economy is successfully withstanding the rise in the key interest rate. However, in the near future, unemployment in the US may jump amid the monetary policy tightening.