The US dollar is likely to end this week with gains. The main reason for its bullish sentiment was the Fed's hawkish comments. The euro, on the contrary, is lacking any drivers. However, it is trying really hard to grow. Some analysts assume that the euro may regain momentum in the middle term. Nevertheless, the majority is sure that the pair will reach an equilibrium.
The US currency climbed markedly following the GDP and labor market data. The final first-quarter GDP estimate shows that the US economy was in much better shape than previously thought. The indicator increased by 2% in annualized terms, well above 1.3% in the second estimate, and forecasts of 1.4%. The upward revision of GDP signaled a steady expansion of the economy despite market worries about the looming recession.
The labor market reports were also upbeat. The number of initial jobless claims for the week that ended on June 24 fell to 239,000, below the forecast reading of 264,000.
The PCE Price Index increased by 4.2%, the highest reading since the second quarter of 2021. At the same time, in the first quarter of this year, the index was revised downwards to 4.1%. In addition, the core index, which excludes food and energy prices, was revised downwards to 4.9% from the previous estimate of 5%. The Fed is closely monitoring fresh macro stats as the regulator uses this data to make predictions on inflation and determine monetary policy.
As a result, in the first quarter of 2023, the US economy showed much stronger growth than predicted. As the US economy has met expectations regarding its resilience, the Fed may maintain aggressive tightening.
Against this background, the yield of US Treasury notes rose as strong reports reinforced expectations of further rate hikes. Jerome Powell also hinted at two rate increases in 2023. Given the latest reports, the central bank is highly likely to hike the interest rate at its next meeting. The probability of a 25 basis point increase totals 86.8% compared with 52.2% a month earlier.
Positive data bolstered the growth of the greenback. Against this backdrop, the EUR/USD pair tried to rise to 1.0940. However, it was a short-term upward movement. The pair collapsed to 1.0860, entering a downward range. On June 30, the EUR/USD pair was hovering near 1.0865, trying to climb higher.
The recent bullish momentum has eased. According to preliminary forecasts, in the near future, the EUR/USD pair may decline to the weekly low of 1.0844.
In June, the EUR/USD pair slid to 1.1000 from 1.0700, almost completely regaining a downward movement. Earlier, some analysts stated that a rally in the US dollar stated in May would hardly be short-lived. So, after a correction, USD could reach parity with the euro. Some currency strategists suppose that the US dollar has already started its upward cycle. It may trigger a rise in EUR/USD to 1.0000.
The current situation is favorable for the greenback. However, further upward movement of the euro looks unlikely, especially given strong US macro stats. Besides, The Fed uses the PCE Price Index as an inflation gauge. Its main priority is to push inflation to the 2% target with a series of rate increases.
The main reason for the potential growth of the US dollar in the near future could be the actions of the US Department of Treasury, which is consistently increasing the debt ceiling. It is planned to sell government bonds worth more than $1.4 trillion within six months. The US Department of Treasury will place bonds with one-year maturity and then refinance them by placing long-term securities. These moves may cause a long-term rally of the greenback.
According to preliminary estimates, the US dollar will strengthen until the US presidential election, which starts next year. Usually, before elections, the authorities try to boost the national currency as well as keep commodity prices low to stimulate consumption and economic growth.
