The EUR/USD pair is still in a multi-month bearish trend, and aggressive sell-offs follow attempts to develop a rally.
After touching the five-year low around 1.0350 on May 13, the single currency set a course for recovery. However, traders who opened long positions on the euro were forced to capitulate when the 1.0800 level was not surpassed. As a result, the EUR/USD pair rolled back to 1.0360.
Last month, the 1.0600 mark turned out to be a tough nut to crack for the bulls, whose next defeat led to a decline to 1.0370.
The prospects for the single currency continue to look dim, so it is not necessary to think that July will be an easy month for it.
Now the 1.0500 level acts as a filter to the upside, while the 1.0340 mark may become the next starting point for moving to the downside.
The EUR/USD pair started the third quarter under pressure. It ended Friday's trading with a decrease of 0.5%, in the area of 1.0430.
Following the results of the last five days, the pair plunged by more than 100 points.
On Friday, Eurostat reported that annual inflation in the eurozone jumped to 8.6% in June from 8.1% recorded in May.
The fact that the consumer price index in the currency bloc has reached another record speaks in favor of the European Central Bank's interest rate hike this month.
However, investors do not seem to expect that the inflation data will have a serious impact on the central bank's upcoming decision on rates. Thus, money markets estimate only a 20% probability of an ECB rate hike by 50 basis points in July.
In addition, ECB President Christine Lagarde said on Wednesday that the eurozone is unlikely to return to an atmosphere of low inflation in the near future, and confirmed the central bank's intention to raise the key rate by 25 basis points in July, despite the fact that other ECB representatives called for a faster recovery.
The losses of the single currency could have been even greater if not for the disappointing report on business activity in the US manufacturing sector from ISM.
In June, the indicator fell to the lowest level in two years, amounting to 53 points against the predicted 54.9 points and 56.1 points in the previous month.
Many experts regarded the unexpected decline in the ISM manufacturing business activity index as another sign of the cooling of the American economy.
On the one hand, these data say that the United States is one step closer to recession, on the other hand, they indicate that the Federal Reserve may raise the rate less aggressively.
Futures on the federal funds rate estimate the chances of its rise in July by 75 bps at 85%. It is assumed that the pace of rate hikes in November will slow down to 25 bps, and in the first quarter of 2023, the Fed will stop the current tightening cycle. By the end of next year, the money market puts in quotes a reduction in the cost of borrowing in the United States by 50 bps from a peak value of 3.5%.
Such prospects do not please dollar bulls at all. On Friday, the greenback was forced to retreat from the two-week peak reached during trading in the area of 105.40. This allowed the EUR/USD pair to reduce both intraday and weekly losses.
The dollar fluctuated between gains and losses on Monday, trading around 105.00.
"As the attention of foreign exchange market participants shifted from concerns about inflation to concerns about the recession in the United States, expectations of a Fed rate hike seem to have peaked after the June meeting of the central bank," Credit Agricole strategists said.
Judging by the sharp decline in the real-time indicator of changes in US GDP calculated by the Atlanta Federal Reserve, the American economy may have already plunged into recession. This tool now indicates a 2.1% decline in economic activity in the country in the second quarter after a 1.6% decline in the first quarter.
"To the extent that the markets took the US data last week as confirmation that the Fed reached the peak of the hawkish mood in June, investors can start taking profits on their stretched long positions in USD," Credit Agricole said.
The greenback is still in demand as a safe haven asset due to concerns about slowing global growth.
"The dollar should continue to expect a fairly solid bottom in the third quarter due to the Fed's rate hike ahead of schedule and the still difficult environment for risky assets due to tightening liquidity and fears of a global slowdown," ING analysts said.
"We believe that the EUR/USD pair is more at risk of retesting the May lows in the coming days than returning to the area of 1.0500-1.0600, given the still unstable global attitude to risk," they added.
This year, the euro has weakened by more than 8% against the US dollar.
The military conflict in Ukraine and its economic consequences, in particular the sharp rise in food and energy prices in the eurozone, have become a serious brake on the single currency.
The difference in the rates of central banks on both sides of the Atlantic also put pressure on the euro.
Meanwhile, the looming threat of an energy crisis in Europe has clouded the prospects for economic growth in the region, further complicating the ECB's task of reducing inflation.
CIBC analysts expect that the restraining factors for the euro will remain, as the ECB is going to raise interest rates on July 21 by only 25 basis points.
"The ECB's actions remain moderate compared to the Fed's 75 basis point increase. In addition to discussing the ECB's monetary policy, the main risks of the European Union are related to the energy sector," they said.
At present, the prospects for Europe do not look so rosy. In the event of a crisis with gas supplies, the EUR/USD exchange rate may fall below parity, economists at Commerzbank believe.
"The crisis with gas supplies may be a specific problem in Europe. If things turn out badly, it will also affect the monetary policy of the ECB and, consequently, will cause a prolonged weakness of the euro. If this happens, we expect EUR/USD to trade below parity," they said.
As natural gas prices rise, recession risks will increase, putting downward pressure on the euro, analysts at MUFG Bank say.
"We have significantly downgraded our 3Q EUR/USD forecast (from 1.0600) and see a parity breach this quarter as a very likely risk," they said.
At the beginning of the new week, the euro struggled to develop Friday's rebound, but faced resistance in the area of 1.0460.
Gas prices in Europe on Monday afternoon exceeded $1,700 per thousand cubic meters for the first time since March, and by evening they were close to the $1,800 mark, rising by almost 13%.
The cost of gas in the eurozone again moved to a sharp increase in mid-June and in recent weeks, amid a general drop in supplies from Russia, continues to grow.
The eurozone economy could go into recession if gas supplies from Russia stop, and European industry will have to adapt to the energy shortage, ECB Vice President Luis de Guindos said on Monday.
"In the event of such a development, according to our alternative scenario, a recession will occur not only in Germany, but also in the entire eurozone," he said.
The EUR/USD pair is consolidating its recent losses, while the risks are still shifted downwards.
The main currency pair remains in captivity of the bearish trend, which indicates a retest of levels below 1.0400, Scotiabank strategists note.
"The daily growth stopped at 1.0450-1.0460, which is the key resistance before 1.0475 and 1.0490, and the 1.0500 area as a whole acts as a stable ceiling.
Support is in the 1.0415-1.0420 zone, followed by Friday's low of 1.0366," they said.
