FX.co ★ USD unlikely to do away with EUR

The US dollar seems to be tired of fighting for leadership. The European currency took advantage of the situation and tried to keep its gains.

On Thursday, May 4, the greenback noticeably weakened against most major currencies, primarily against the euro. This happened after the Federal Reserve paused its aggressive cycle of monetary policy tightening. Notably, on Wednesday, May 3, the regulator raised interest rates by 25 basis points to 5.00%-5.25% per annum. In addition, the regulator does not rule out a pause in further rate hikes, as it needs to assess the consequences of recent bank bankruptcies, wait for the decision on the US debt ceiling from President Joe Biden's administration, and monitor inflation dynamics.

Against this backdrop, the US dollar came under pressure, thus allowing its European counterpart to benefit from the situation. As a result, the dollar gave way to the euro, which confidently gained momentum. On Thursday, May 4, the EUR/USD pair was trading near 1.1086, trying to consolidate in an upward spiral.

Analysts believe that the greenback will get support if market participants revise their expectations of rate cuts in 2023. However, currency strategists at Rabobank point to the risk of a decline in the EUR/USD pair to the critical level of 1.0600 in the second half of this year.

The short-term outlook for the European currency is neither positive. Rabobank believes that in the coming months, the euro may decline, reacting to a weakening eurozone economy. At the same time, the upward momentum in the EUR/USD pair, which has been observed since the fourth quarter of 2022, will reach its peak. Against this backdrop, the further upward dynamic causes doubts.

Some analysts who predict a fall in the dollar are relying on the fact that the Fed will soon stop raising rates, while other central banks will continue to tighten their monetary policies. Many market participants doubt a further rise in the US dollar. Analysts are recording the smallest number of bullish positions on the USD since 2021. However, sellers may also face some risks. If inflation remains stably high, market expectations of the Fed's monetary policy easing may not be met. In such a scenario, the greenback will remain strong for a long time, although it may depreciate in the next year or two.

If inflation remains high, the Federal Reserve will have to revise its strategy to bring inflation back to the target level of 2%. Jerome Powell, the Fed's Chairman, agrees with this, stating that cutting rates is not advisable as inflation now requires some time to decrease.

In addition, the FOMC chairman, commenting on the monetary policy outlook added that the regulator would be able to continue cooling the labor market without massive unemployment growth. Jerome Powell also noted the possibility of avoiding a recession. He added that the Fed would assess the restrictive policy level. According to Jerome Powell, the Federal Reserve will return to these important issues at the next meeting in June.

Notably, the decision to increase the interest rate by 25 basis points was unanimous. This is the tenth consecutive rate hike since March 2022. Representatives of the Federal Open Market Committee (FOMC) still consider it appropriate to have some additional policy tightening necessary to achieve the 2% inflation target.

The FOMC will monitor the economic growth, inflation levels, and the state of financial markets. Meanwhile, economic growth remains modest. Experts believe that, in the light of the recent banking collapse, lending conditions for households and businesses will tighten. This will put pressure on economic activity, employment, and inflation.

Against this backdrop, the steady growth in the dollar is in question, while the euro's positions also remain shaky. However, analysts expect the gradual recovery of the EUR/USD pair and confident movement towards the next peaks.