The US dollar has taken a timeout after rising steadily earlier. The euro, in the meantime, tries to build momentum, often not without success. The tug of war between EUR and USD has now halted, but the currencies are far from equilibrium.
Rising risk appetite in the market have pushed the US dollar down for a short period of time, allowing the euro to recover. Risk sentiments increased at the beginning of the week after the UK government's radical monetary policy U-turn, particularly the planned tax cuts. The UK government's statements not only gave support to the pound sterling, but also helped the euro strengthen its position a little.
The pound sterling's performance is likely to significantly affect the euro in the short term, analysts say. However, GBP is likely to jeopardize EUR's stability - the European currency could be knocked out by a new bond sell-off, particularly in the UK. The eurozone's economy faces important challenges, such as slowing down inflation. Price growth has hit record highs amid growing energy prices and the escalation of the conflict between Russia and Ukraine. This situation is preventing the euro from steadily recovering, analysts note.
Growing concerns over an intensifying global financial crisis is weighing down on the markets, holding back optimism of market players. Investors are still worried about potential economic problems caused by rising borrowing costs and geopolitical risks. Recession anxiety is on the rise around the world, and it is exacerbated by China's "zero COVID" policy, experts say.
The only currency that can take advantage of this situation is USD. However, its triumph could, in fact, turn out to be merely illusory. Prospects of a more aggressive monetary policy tightening by the Federal Reserve has given support to the US dollar. The Fed's current strategy is weighing down on EUR/USD, and the pair is far away from its October's high near the parity level it hit at the beginning of the month. Early on Tuesday, October 18, EUR/USD traded at 0.9855, trying to break out of its current price range.
FX strategists at ING are skeptical about EUR/USD's short term rally and expect the downtrend to resume. They forecast that the euro would remain under pressure in the near future, and that the pair would test September's lows near 0.9540. Analysts say that EUR/USD could fall below this level by the end of 2022.
Many market players are sure that the US regulator would continue to hike interest rates to push down inflation. For traders and investors, a 75 basis point hike in November is now certain. These expectations are reinforced by hot US inflation data and recent hawkish statements by several Fed policymakers. This situation favors USD bulls, while the optimal direction for EUR is southward, analysts say.
The Fed's rapid interest rate hikes have strengthened the US dollar, but its rise could end if interest rate increases stop, James Bullard, the president of the Fed Reserve Bank of St. Louis said. Rate hikes strengthen the dollar, which in turn increases pressure on the global economy and negatively affects revenues of major companies. An overtly strong US dollar will drive down revenues of major market players. As a result, many companies could face difficulties at the beginning of 2023, experts warn.
The ongoing situation is exacerbated by a possibility of a recession. According to The Wall Street Journal (WSJ), the US would face an economic downturn in 2023 coupled with rising unemployment amid further interest rate hikes. The recession would negatively affect the labor market, bringing down non-farm employment by 34,000-38,000 jobs per month, WSJ predicts.
Jamie Dimon, the CEO of JPMorgan Chase, has a similar outlook. He sees the US economy enter a recession within the next 6-9 months. The high level of global economic uncertainty, which is particularly visible in the stock market, is adding fuel to the fire. Holders of US Treasury bonds are dumping stocks, which is a wake-up call, Dimon noted.
