The EUR/USD pair started a new week in the green zone, but then turned down, declining by almost 0.15% at the end of Monday's trading.
At the same time, the greenback gained new strength and rose in price by more than 0.2% relative to its main competitors.
The resumption of USD strengthening in the afternoon caused the EUR/USD pair to move into the red zone by the end of trading. Noting a local high in the area of 1.1585, it rolled back to 1.1553.
The main currency pair has sunk by about 2% since the beginning of September.
According to the strategists of Goldman Sachs, the following reasons led to the recent weakening of the euro against the US dollar to annual lows: reduction of differentials in real rates, capital flows associated with hedging, and a relative downward revision of the growth of the European economy.
The latest data from the US Commodity Futures Trading Commission (CFTC) indicates that in the week before October 5, large speculators increased their bets on a further rise in the USD and for the first time since March 2020 put on a decline in the EUR. Most experts agree with them, who believe that the maximum strengthening of the US currency will show against low-yielding competitors like the euro.
The dollar is likely to remain strong due to the hawkish attitude of the Federal Reserve and the uncertainty associated with the recovery of the global economy, analysts at Capital Economics believe.
The US currency continues to benefit from expectations regarding the imminent reduction of stimulus measures by the Federal Reserve, which the central bank may begin as early as November, as well as a possible increase in the US interest rate. Despite the disappointing US employment figures released on Friday, these expectations have not weakened.
"Although the overall indicator for American employment was weak, if you go into details, the statistics presented do not look as bad as it might seem at first glance, so there is still nothing that would prevent the Fed from reducing monetary stimulus next month," Barclays analysts said.
Rabobank strategists believe that the greenback will continue to rise in price, and, according to Saxo Bank analysts, the US currency will make the life of dollar bears quite miserable in the fourth quarter. They predict that in the near future investors will begin to "seriously" put into quotes the prospects of the Fed's reduction of the asset purchase program.
"We are to some extent approaching tapering in the US, while other countries are still quite far from it. Central banks, like the ECB, will maintain the status quo, perhaps for another two or three years, and this speaks in favor of further growth of the dollar," the CIBC reported.
The unprecedented rise in gas prices and expensive oil also support the US currency against the euro, Carmignac analysts say.
"The United States is self-sufficient in this regard, that is, it provides itself with gas and oil, while Europe does not," they noted.
In addition, rising commodity prices, as well as higher wages, create much more stable price pressure in the United States, and in these conditions it is unlikely that the Fed will postpone the curtailment of monetary stimulus, despite weaker than expected September data on the national labor market. This is good news for the US currency.
Meanwhile, increasing inflation concerns due to rising energy prices and divergences in the exchange rates of the Fed and the ECB continue to undermine the position of the euro.
European Central Bank Chief Economist Philip Lane dismissed the recent surge in inflation in the eurozone as a trigger for monetary policy. In addition, ECB Governing Council member Yannis Stournaras rejected the theory of rising energy prices and, ultimately, raising rates in the near future due to higher inflation. The dovish forecast of the ECB, contrasting with the signals of its American counterpart about a possible increase in the federal funds rate, negatively affects the prospects of the single currency.
At the same time, the hunt for better returns remains the dominant factor in strengthening the dollar.
On Tuesday, the USD index rose above 94.50 points, coming close to the annual peak reached at the end of September.
"The main driver of this movement is the growth in the yield of US Treasury bonds, which we are seeing. So this is a fairly simple story of an increase in the difference in rates, strengthening the attractiveness of the dollar from the point of view of "carry"," said strategists at National Australia Bank.
Today, the yield on two-year treasuries jumped to a more than 18-month high, rising above 0.354%, as investors bet that rising energy prices would fuel inflation and increase pressure on the Fed to raise interest rates.
The yield of five-year securities rose to almost 1.095%, which is the highest since the end of February 2020, and the yield of "ten-year notes" reached a four-month high of 1.628%.
The increase in market rates in the US and the expansion of spreads between treasuries and European counterparts supports the demand for the dollar and limits the growth of the EUR/USD pair.
On Tuesday, it marked a local high in the area of 1.1570, but then it rolled back again.
The pair reacted by falling to data published by the ZEW Institute, according to which the index of investor confidence in the German economy in October fell to 22.3 points from 26.5 points recorded in September. Analysts expected the indicator to decrease to 24 points.
In addition, the index of current economic conditions sank to 21.6 points from 31.9 points in the previous month.
"Germany's economic prospects have sharply deteriorated. The new decline in ZEW's economic expectations is mainly due to continuing restrictions in the supply of raw materials and intermediate products," said ZEW President Achim Wambach.
Also, according to the organization, the index of current economic conditions in the entire eurozone decreased to 15.9 points from 22.5 points a month earlier.
The ECB's forecast for eurozone GDP of 5.0% for 2021 now looks strained, according to MUFG Bank.
On the other side of the Atlantic, economists are finding more and more signs of slowing consumer demand, starting with a drop in the growth rate of spending on restaurants and ending with weak box office receipts of the new James Bond film.
Goldman Sachs lowered its forecast for US economic growth for the second time in two months. Now the estimate assumes GDP growth of 5.6% this year (instead of 5.7%) and 4.0% next year (instead of 4.4%).
"If it weren't for the huge amount of savings accumulated by the population during the pandemic, we would be much more worried. The obvious risk is winter. We don't think anyone knows whether it will lead to another surge in morbidity and hospitalizations," J.P. Morgan Asset Management specialists noted.
Despite the slowdown in the US economic recovery, the greenback continues to be in demand, including as a safe haven asset, while the single currency remains in the background, as investors cannot yet find reasons to reverse its direction.
As for the technical picture, the EUR/USD pair is trading below the 50-, 100- and 200-day moving averages, demonstrating a bearish mood and confirming the low interest of euro bulls.
The initial support is at a 15-month low near 1.1530 and then at 1.1500. Closing below this mark may attract bears and provoke a fall in the direction of 1.1475 and 1.1450.
On the other hand, a breakthrough of resistance at 1.1580 will allow the pair to develop growth to 1.1620, and then to 1.1620 and 1.1685.
