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16.09.202208:34 Forex Analysis & Reviews: Different aspirations in EUR/USD: it is important for the dollar to hold positions, and for the euro to expand its borders

Exchange Rates 16.09.2022 analysis

By the end of the week, the confrontation between the US and European currencies manifested itself most clearly. There is no obvious confrontation in the EUR/USD pair, but the dollar's efforts to consolidate within the existing borders are present. At the same time, the euro, overcoming the attraction of the downward trend, seeks to expand its zone of influence.

On Friday, September 16, the greenback slightly "descended from heaven" and moved away from multi-year highs after a steady growth at the beginning of the week. At the same time, market participants expect the Federal Reserve to further raise interest rates to curb inflation. The current situation contributed to an increase in the yield of US Treasury bonds and raised the demand for USD.

The catalyst for the growth of bond yields was strong macroeconomic reports from the United States, in particular positive retail sales data. The August consumer price index in America caused a shock in the markets, demonstrating an unexpected recovery in retail sales (by 0.3%). At the same time, the US Department of Labor reports that the number of initial applications for unemployment benefits decreased by 5,000, to 213,000. According to analysts, this indicates the strengthening of the American economy, which is able to withstand an increase in interest rates and derive tangible benefits from it.

Against this background, investors have revised their expectations regarding the size of the rate hike. After a sharp increase in the US consumer price index, investors expect the Fed to raise the key rate by an additional 25 bps. The implementation of such a scenario will open up new opportunities for the greenback, giving it another impetus for growth. However, the strengthening of the European Central Bank's hawkish position will be an obstacle to the further rise of the USD. At the moment, the ECB is determined to raise rates and tighten the monetary policy in the region.

In the current situation, it is becoming more difficult for the dollar to maintain the positions it has won, although the euro is still weak. However, the single currency seeks to expand the existing borders, trying to push the American rival. The EUR/USD pair was trading near 0.9983 on the morning of Friday, September 16, trying to go above parity. The euro was tripped up by the energy crisis in Europe and a powerful increase in fuel prices. The negative macro statistics in the euro bloc countries added fuel to the fire. In mid-summer, industrial production in the region fell by 2.3%, being twice as bad as forecasts. The growth of consumer prices has had an extremely negative impact on the euro's dynamics.

Exchange Rates 16.09.2022 analysis

Against this background, the dollar is steadily gaining momentum. In the near future, experts expect a new round of USD growth. An additional bonus for the greenback will be another increase in the Fed rate.

Next week, the so-called "parade of central banks" is expected, many of which will hold their meetings on the key rate. At the moment, futures on Fed funds show a 25% probability of a rate hike by 100 bps. At the same time, the dollar will continue to strengthen in the near future.

The Fed meeting scheduled for next week will be the biggest event for financial markets. However, important events will also take place at the regional level, namely central bank meetings in England, Japan, Sweden and Switzerland. Market participants expect them to raise the key rate.

The implementation of such a scenario will strengthen the greenback's position and give it a head start over other currencies. According to analysts, there is little that can stop the strong USD, which has risen by 15% against a basket of major currencies. The current situation is favorable for dollar bulls, whose actions have pulled down the euro and the yen to the lows of the last 20 years, and the pound to the lowest level in 40 years. According to Commonwealth Bank of Australia currency strategists, the dollar will remain strong as long as the prospects for the global economy are weak enough.

Larisa Kolesnikova,
Analytical expert of InstaSpot
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