FX.co ★ EUR/USD: dollar is hitting the gas, and the euro is bursting at the seams

The EUR/USD pair enjoyed a rally for almost a month, taking advantage of the dollar's retreat from the peaks of nineteen years ago, recorded on July 14 in the area of 109.30.

Investors abandoned the protective greenback in favor of riskier assets. This was largely facilitated by talk that the US central bank may slow down the pace of interest rate hikes amid a cooling of the national economy and a weakening of inflationary pressure in the country.

According to preliminary estimates, the world's largest economy shrank by 0.9% in the second quarter. US GDP decreased by 1.6% in the first quarter. Two consecutive quarterly recessions broadly correspond to the definition of a technical recession.

In response to such data, traders lowered their bets that the Federal Reserve will hold a third consecutive increase in the base rate by 75 basis points in September, and instead chose an increase of half a percent.

The euro showed the largest one-day gain against the dollar (by 0.8%) on August 10 after the release of data that showed that inflation in the United States in July was 0% on a monthly basis. In annual terms, the indicator decreased to 8.5% from 9.1% achieved in June.

The main currency pair lost its upward momentum on the approaches to the 1.0370 mark. Then it moved to a decline and quickly returned to multi-year lows.

Apparently, the greenback only took a breather, maintaining a long-term upward trend.

The new exploits of dollar bulls were inspired by FOMC members, who noted that the strong labor market indicators for July indicate that economic activity in the United States is stronger than expected in the weak second quarter, which increases the likelihood of an upward revision of GDP data.

In addition, Fed officials indicated that several monthly declines in the growth rate of the consumer price index will be required before the central bank abandons the aggressive tightening of monetary policy that it has undertaken to curb inflation.

The half-million increase in the number of people employed in the United States last month, combined with a slowdown in inflation, which is no longer so much corroding the purchasing power of the dollar, served as a tailwind for the greenback.

It took the dollar a little more than a week to win back most of the positions lost from the main competitors as a result of the retreat from almost twenty-year peaks.

The single currency has returned to a downward trajectory as the European region faces an acute energy crisis and growing recession risks.

Last month, the breakthrough of the EUR/USD parity level turned out to be fleeting, and the pair briefly fell below the key mark.

However, this time the breakdown of an important watershed may be more stable and longer, experts warn.

Following the results of the last five days, the greenback strengthened by about 2.3% against its main competitors, including the euro, which was the best weekly indicator since April 2020. The EUR/USD pair closed close to parity, finishing around 1.0030.

The dollar maintained its fighting spirit at the beginning of the new week, and the euro was unable to regain its position after a sharp fall last week.

The greenback is getting more expensive again, because everything – from the slowdown in economic growth in China to the tightening of the Fed's policy and energy security in Europe – is forcing investors to seek refuge, Bloomberg reports.

The markets are in risk-averse mode on Monday, and the greenback is making the most of it, trading with an increase of more than 0.7%.

USD is not thinking of stopping yet and is moving further up from the level of 108.00.

Further development of the upward momentum looks increasingly likely, at least in the near future.

The initial obstacle for the greenback is at the round level of 109.00. As soon as this level is overcome, the current year's high at 109.30 will come into play, and then the peak of September 2002 at 109.75.

"The US dollar may rise above 110.00 this week if the August data on the business activity index in the major economies show a further slowdown in economic growth or a reduction in activity. We also expect Fed Chairman Jerome Powell to make a hawkish statement on inflation, in line with recent comments by other FOMC officials supporting the dollar," Commonwealth Bank of Australia strategists said.

Market participants are waiting for the symposium of the US central bank scheduled for this week in Jackson Hole and hope to get more information on the monetary policy of the central bank.

"What we need to hear and probably will hear this week is a rebuttal of the idea that the Fed believes it has tightened lending conditions enough to solve the inflation problem, or that, as some suggest, it will blink at the first signs of economic weakness and stop raising rates or may even start them reduce," said the specialists of Principal Global Investors.

"Powell is likely to emphasize that growth is slowing down, and probably will continue to slow down, but inflation will be sticky, and the priority is to contain inflation. The central bank is not going to stop in response to weaker growth," they added.

"Stubborn inflation continues to pose the biggest threat to the economy. Inflation may not decrease in accordance with the Fed's plan. In this case, interest rates should be much higher, somewhere in the range of 4-5%," BMO Capital Markets believes.

The basic price index of Americans' spending on personal consumption for July will be published on Friday. The stronger the data, the higher the probability that the Fed will raise the key rate by 75 basis points at the September meeting.

While the dollar continues to strengthen on expectations of a Fed rate hike, the euro is under pressure from concerns about the economy of the currency bloc amid the ongoing energy crisis.

On Monday, the EUR/USD pair reached its lowest values since December 2002, dropping below the 0.9930 mark.

"The EUR/USD pair can trade below parity for most of the week. Gazprom will close its main pipeline for gas delivery to Western Europe for three days from August 31 to September 2. The termination of the supply of blue fuel may again cause fears that there will be a permanent shutdown. The index of business activity in the eurozone is likely to highlight the risks of recession on Tuesday," analysts at Commonwealth Bank of Australia predict.

The sword of Damocles hanging over the European economy will not disappear, Societe Generale strategists say.

"In Germany, gas prices, water levels in the Rhine and inflation have a devastating effect on business confidence. A very bad German PMI index may be enough to consolidate EUR/USD under parity, even if other European countries feel better," they believe.

On Monday, the single currency suffered not only from the strengthening of the dollar on a broad front, but also from the Bundesbank's monthly report, in which the central bank noted that a recession in Germany is becoming more likely, and inflation will continue to accelerate and may peak at more than 10%.

"The Bundesbank warned that inflation risks are shifting upward and that the chances of a contraction of the economy this winter have increased significantly due to forecasts for natural gas. Against this background, the single currency fell below parity, reaching its lowest level since July 14 and testing the low of that day near $0.9950. The next target of the bears will be the low of September 2002 in the region of $0.9615," BBH economists said.

According to Scotiabank analysts, the most popular currency pair in the world looks inclined to a more stable weakening.

"Last month, the EUR/USD pair formed a fairly strong base – apart from a short-term breakout to a low of 0.9952 - so a daily close below 1.0000 is likely to be perceived as a signal for a further, longer, decline in the euro. The nearest resistance is at 1.0050 and further – at 1.0120. Trend indicators have a pronounced bearish character. Slight strengthening of the euro from a technical point of view is a signal to sell," they noted.