The outgoing week and the entire past month brought complete disappointment to bulls on the EUR/USD pair. But when will the black streak for the euro end? Should we expect a miracle in July?
Despite yesterday's rise of almost 0.4%, the EUR/USD pair is preparing to end the current week with a decline. The euro has fallen 0.86% against the dollar since Monday.
The dollar, on the contrary, is on its way to its best week in the last four years. The greenback index rose by 0.66% in four days, as expectations of further tightening of the Federal Reserve's monetary policy intensified.
Recall that in June, the US central bank decided on the largest rate hike since 1994, raising them by 75 bps. Now the market is inclined to the fact that the situation will repeat at the end of July.
However, such a scenario is ambiguous for the dollar, because the Fed's overly aggressive tactics could lead the US to recession. Concerns about slowing economic growth in America are a key obstacle for the greenback these days.
Nevertheless, the dollar now looks much more attractive than its European counterpart. The economic situation in Europe, which has not even started raising rates yet, is more precarious than in America.
The situation in the eurozone is aggravated by the energy crisis caused by sanctions against Russia in response to its special operation in Ukraine. Because of this, the European Central Bank's policy tightening cycle is likely to be less prolonged and aggressive than that of the Fed.
Earlier, the ECB has repeatedly reported that it is preparing to raise interest rates at its July meeting. This will be the first increase in the indicator in 11 years.
Economists are betting that the central bank will start the cycle with a minimum step of 25 bp and will probably stick to this pace in the future.
However, as the experience of the Bank of England shows, which has already raised rates by a quarter of a percentage point five times, a dovish strategy is unlikely to help keep inflation under control.
Meanwhile, consumer prices in the EU countries increased by 8.1% in May. Statistics on inflation in the eurozone for June will be released today. According to forecasts, the annual CPI will reach 8.4%.
If the price pressure in Europe really increases, it may provoke another wave of speculation about a more hawkish ECB policy. Against this background, the probability of euro growth is high.
However, let's be realistic. Even if the ECB dares to raise rates by 50 bps at once in July, it is unlikely to help the euro snatch a long-term advantage from the dollar.
The divergence in the policy of the ECB and the Fed is too big. Since March, the US central bank has raised interest rates by 150 bps already, and as we noted above, this is far from the limit.
At the moment, the Fed is clearly leading the global monetary race. According to experts, this should support the dollar in almost all directions in the foreseeable future, so do not expect miracles for the EUR/USD pair against the background of the July rate hike in the EU.
It is also important to remember that the global tightening trend that we have been seeing lately poses a great threat to global economic growth.
If fears of a global recession continue to grow, this will lead to a significant drop in appetite for risky assets such as the euro. And safe haven currencies, which traditionally include the US dollar, the Japanese yen and the Swiss franc, on the contrary, will be in high demand.
According to analysts, the EUR/USD pair will continue to decline in July and possibly fall back to the level of 1.02. Moreover, some experts do not rule out that the euro may reach parity against the dollar.
