At the end of the week, the US dollar maintains a strong bullish bias. It has grown significantly following the Fed's meeting minutes, while the euro, on the contrary, dropped. Therefore, the euro is desperately trying now to consolidate at the current levels and not slide into a negative zone
Currently, analysts are extremely concerned about the prospects for the European economy and the euro. Notably, the bears asserted strength after the July ECB meeting and a 50 basis point interest rate hike. However, a rate increase did not affect the economic situation and inflation in the eurozone.Analysts assume that the ECB will maintain its hawkish stance even in case of force majeure. For instance, the eurozone may face a devastating energy crunch this winter. Soaring gas prices and extremely low economic growth are also weighing on the market sentiment. The economy expanded by only 0.6% in the second quarter of 2022, which is slightly above the zero level.
It is hardly surprising that the greenback is extending its rally, trading near a new monthly high. It regained ground amid the Fed's commitment to further aggressive rate increases. Notably, the Fed will discuss its future steps on monetary policy at the Jackson Hole symposium scheduled for August 25-27. According to the July meeting minutes, Fed officials support a strong US dollar. Analysts also note that the appreciation of the US currency is beneficial for the US economy as it helps to lower import prices as well as inflation. Fed policymakers believe that a strong US dollar will not hurt the national economy. Now, a rally in the US dollar is mainly fueled by the Fed's aggressive monetary policy.
Many economists consider the greenback overvalued. Yet, it does not stop the US currency from reaching new highs. It is expected to rise steadily in the coming months although its overbought status may hinder further growth. The greenback is supported by the immutability of the Fed's course aimed at raising interest rates. The Fed's hawkish stance will continue to facilitate its rally.
In addition, the US currency climbed higher amid positive US labor market data. The number of initial jobless claims decreased by 250,000. Analysts had expected the reading to rise by 265,000 As for the number of people employed in the US non-agricultural sector, this indicator advanced by 390,000.
The watchdog supposes that the strengthening of the US dollar may lower import prices. In turn, it could also help the regulator achieve the 2% inflation target. FX strategists also emphasize the steady growth of the US dollar against the euro for a long time. The bears are in control. So, the euro is trying not to fall deeper. By the end of this week, the European single currency sank sharply, rolling back from a relatively strong range of 1.0150-1.0160 to a critical level below 1.0100. A breakout of this level may push the euro to the parity level. On August 18, the EUR/USD pair plummeted to 1.0107, the lowest level since July 27 this year. Currently, the pair is trading near the summer lows amid the strengthening of the greenback across the board and strong bearish sentiment. On August 19, the EUR/USD pair slipped to 0.0076. So, it may test again the parity level.
The latest US CPI data revealed that inflationary pressure may ease. However, this report will hardly impact the Fed's key rate decision. The majority of policymakers are backing further rate hikes as they want to see inflation steadily running at the 2% target. At the same time, inflation figures slowed down slightly along with inflation expectations. The regulator reckons that a one-time drop in inflation does not mean that consumer prices will continue to decline. The recent fall in gasoline prices will help lower inflation in the short term. Yet, it would be unwise to rely on falling commodity prices. A recent decline in consumer prices is not the reason to expect a further steady decrease, the Fed minutes read.
Following the meeting, the Fed officials unanimously supported a second rate increase of 0.75%. The FOMC specified the new target range for the federal funds rate at 2.5% and for borrowing costs at 3.5% this year. The regulator said that it could slow down the pace of monetary tightening if inflation reaches its 2% rather level. Such a scenario provides significant support for the US currency. The euro, on the contrary, may sink lower. A strong uptrend of the US dollar eclipses short- and medium-term growth of the euro However, the US dollar seems to have halted its rise. The euro may take advantage of the situation.
The Fed minutes emphasize that the central bank may take a pause in monetary tightening. Yet, it is unlikely to happen in 2023. When the restrictive rate level is reached, the Fed may not raise the rate for some time. However, it will continue to hike it. Analysts contemplate that aggressive tightening is the right decision against the background of constantly growing inflation and the transition to the restrictive level on the interest rate.
According to preliminary estimates, the probability of a third consecutive increase in the interest rate by 75 basis points at the September meeting totals 36%. In March 2023, the key rate is projected to reach 3.7% and remain at this level for several months.
