The EUR/USD bullish rally seems to have exhausted itself, and the dollar is starting to gain momentum. In the coming weeks, the dollar index is expected to rise to 100.00.
The alleged escalation of tensions in Ukraine was not in the hands of dollar bulls. Now this information has come to naught, there are no serious attempts to compromise. If it comes to escalation again and stable positive sentiment appears in the markets, the dollar exchange rate may fall. At the same time, a strong drop below the 97.00 mark is not expected.
The US currency has not yet fully benefited from the growth in yields that is taking place this year. Everything is still ahead.
Here is how the analysts of UOB Group Global Economics & Markets Research commented on the situation with the increase in the yield of 10-year treasuries:
"We will not be surprised by the breakthrough of the 2.200% mark. The main support zone is between 1.998% and 2.070%. It is unlikely to be under threat, at least for this month or so. If the 10-year yield rises above 2.557%, it will face serious long-term downtrend resistance connecting the highs of June 2007 and October 2018 (currently running at 2.620%)."
The focus is on macroeconomic data. Depending on the indicators, traders will put a rate increase in the prices now from both sides. The European Central Bank may also start tightening policy this year with accelerating inflation. The Federal Reserve is ahead of the ECB in this direction, so the dollar looks stronger.
A significant impact in the short term on the EUR/USD pair may be provided by the data of the US Bureau of Economic Analysis RCE. The core PCE price index, which the Fed uses to analyze the situation, is expected to grow to 5.5% year-on-year compared to January's 5.2%.
A stronger PCE indicator may increase the chances of a rate hike by 50 bps in May and help the dollar climb higher. The dollar index traded in the black on Thursday, after consolidation during the Asian session, it again settled above the 98.00 mark.
Market volatility increased during the US session. This is due not only to traders' assessment of the macroeconomic picture, but also to flows at the end of the quarter. The last rise observed in the EUR/USD pair can be considered as an opportunity to make a profit.
US stock index futures are in the red, which means that the single currency cannot remain stable against the dollar in the event.
Meanwhile, the prospects for ending the zero-interest policy in the eurozone are now speaking in favor of the euro. According to Westpac economists, the EUR/USD pair will weaken the bearish mood if Thursday closes above the 1.1175-1.1190 zone. In this case, there will be a probability of correction in the direction of 1.1475-1.1500. Support has risen to the area of 1.1000-1.1050.
The general inflation rate for the eurobloc will be released on Friday. ECB Vice President Luis de Guindos said today that prices will continue to rise over the next few months.
"Medium-term inflation will not return to the pre-pandemic equilibrium below the target level, but, subject to appropriately adjusted monetary policy, may rather stabilize around the ECB's 2% target," ECB Chief Economist Philip Lane also said on Thursday.
Among the most important issues for the euro are the outcome of negotiations between Russia and Ukraine, as well as the gas issue. New rules for buying gas in Russia come into effect on April 1.
Rejection of Russian gas is fraught with costs for the eurozone. The United States will not be able to compensate for the volumes purchased in Russia, which is 40% of all gas consumed in the EU. To make payments in rubles, they will have to buy Russian currency on the currency exchange market or from the Bank of Russia. In other words, the EU will have to partially lift the sanctions on the operation of the SWIFT international financial messaging system.
The SWIFT system, in theory, should play the role of a financial instrument that promotes globalization, but it has been turned into a system of pressure on Russia. The disruptions are unprecedented, which should be an alarm signal for countries using SWIFT.
There seems to be an open confrontation between Russia and the EU ahead regarding the issues of payment for energy resources. The EU will have to pay for the economic campaign led by Washington against Moscow.
The bottom line is that the US dollar will survive, its dominant positions will not go anywhere, which cannot be said about the euro. The single currency may suffer record losses.
