The European currency, the greenback's rival for the EUR/USD pair, is still in limbo.
The dollar has had an impressive rally this month, which is now gradually slowing down. The catalyst for this was the decline in the yield of 10-year treasuries, the growth of which stalled near 3%. To date, long-term US Treasuries have tested zero for the first time since 2020.
The American currency is supported by two powerful drivers - the expectation of an early rise in interest rates by the Federal Reserve and the Russian-Ukrainian conflict. Earlier, Mary Daly, the head of the San Francisco Fed, confirmed the central bank's plans to bring the rate to 2.5% by the end of 2022. According to the FOMC representative, an increase in interest rates by 50 bps is possible "at several Fed meetings." James Bullard, President of the Federal Reserve Bank of St. Louis, agrees with this opinion. The politician allows the central bank to raise the rate by 75 bp at once. Recall that the head of the Fed of St. Louis is in the forefront of the Fed in the issue of aggressively raising rates in order to curb inflation.
Despite the local weakening of the US currency, it retains a strong potential for growth. In addition to expectations of an early rise in the Fed rate and the launch of a quantitative tightening program, the USD is supported by the risk aversion of traders. Experts attribute the decline in risk appetite to the sliding of the global economy into recession.
The greenback shows caution against this background, maintaining its strength, but not demonstrating it. The greenback rose slightly against the euro on Thursday evening, April 21, reaching 1.0847. The EUR/USD pair was cruising near 1.0815 on the morning of Friday, April 22, trying not to slide to the bottom.
According to experts, the current mood in the currency markets is positive for the US currency, which cannot be said about the European one. According to the calculations of Nordea economists, at the end of 2022, the EUR/USD pair will be near 1.1000, and over the next three months it will test the 1.0500 mark.
The catalyst for the recent rally of the EUR/USD pair was the hawkish comments of the European Central Bank leaders. According to Martins Kazaks, a representative of the central bank, an increase in the key rate is possible in July. The policy was supported by Luis de Guindos, vice-president of the ECB, who expects the QE program to be curtailed in the specified month.
The current vulnerability of the euro is fueled by the prolonged Russian-Ukrainian conflict. The tension in relations between Europe and Russia increases uncertainty in the dynamics of the euro and calls into question the economic prospects of the eurozone.
As for the dynamics of the dollar, the Russian-Ukrainian conflict, on the contrary, played into the hands of the latter. At the same time, experts are confident that the current geopolitical confrontation will affect the European economy more than the American one. Against this background, on the wave of growth, the greenback returned to pre-pandemic levels, maintaining the status of a reliable protective asset.
The USD was strengthened by the expectation of an economic recovery in the United States, capable of outstripping that in other countries. The implementation of such a scenario will allow the Fed to begin the cycle of monetary tightening faster. However, there are pitfalls here, the main one of which is the high risk of recession in the US economy. A sharp drop in the purchasing power of American households can slow down economic growth in the United States. Adding fuel to the fire is the likelihood of an aggressive tightening of the Fed's monetary policy.
As for the prospects of the European economy and the euro, they will improve only if the geopolitical conflict is offset. However, this is still far away, as the euro is in a situation in which something bad could happen to it at any time and it is seriously worrying the markets. According to Thomas Mayer, former chief economist at Deutsche Bank, the euro is rapidly losing stability. According to the analyst, the European Union is threatened by prolonged inflation, the result of which will be the "destruction of the euro." At the same time, the ECB continues to print banknotes, but does nothing to normalize the economy, Mayer believes. According to the expert, strong inflation in the eurozone threatens negative long-term economic and social consequences.
Earlier, Alexandre del Valle, a French political scientist and economist, announced the possible collapse of the euro. The analyst paid special attention to anti-Russian sanctions that could push the single currency and the eurobloc economy into the abyss. Del Valle accused the White House of pushing the European Union to tighten sanctions and abandon Russian energy carriers, stressing that these measures would lead "to the collapse of the euro and an explosion in prices." At the same time, the United States imposes its shale gas on the Europeans, which is more expensive than Russian LNG.
The current situation is undermining the positions of the EUR/USD pair. However, experts are counting on the relative stability of the pair in the medium term. According to ING bank economists, in the coming months the EUR/USD pair will consolidate in a wide range of 1.0500-1.1000. In 2023, the existing monetary trends will not lose relevance. The Fed is expected to approach the peak of monetary tightening, and the ECB will continue its hawkish monetary cycle, albeit at a slower pace. The implementation of such a scenario will allow the EUR/USD pair to strengthen to 1.1600 and remain in this range during 2023, Nordea Bank believes.
