21.09.202200:07 Forex Analysis & Reviews: EUR/USD. The rules of the game will change at the end of the week

The beginning of a new week turned out to be difficult for the euro, the EUR/USD rate is quoted below parity. However, at the end of the week, significant changes in the balance of power may occur. Factors are likely to develop so that the single currency will have a chance to rebound.

Of course, the key event of this week is the Federal Reserve meeting. The dollar has soared after the growth of the core consumer price index and continues its upward movement in anticipation of a more aggressive attitude of the Fed in September and at the next meetings. Market players are in the process of realizing that the US central bank will continue tightening measures to the bitter end over inflation.

The rules of the game were changed after the release of US inflation last week, in a similar way they may change this week. Some analysts are inclined to believe that the Fed meeting will eventually lead to a fireworks rally of the single currency a little later.

Reminders to the market on Thursday and Friday from European Central Bank representatives that there may be new interest rate hikes ahead did not help the euro, but only stabilized the currency. The important point now is that Europe does not want to see a further weakening of the euro.

"We don't focus on the exchange rate, but this is something we look at very carefully. The depreciation of the euro has had a negative impact on the cost of energy in euros," ECB Vice President Luis de Guindos said.

"Further depreciation of the exchange rate may negatively affect inflationary pressure. On the contrary, if the euro stopped depreciating, it could be a positive factor and support the fight against inflation. I hope that the recent downward trend will be reversed in the near future," the official added.

New rate hikes may occur in the coming months, and the ECB is likely to actively use currency interventions to support the euro. But actively using aggressive rhetoric, the ECB representative felt it necessary to add that much will depend on new economic data. Returning an almost double-digit inflation rate to the target level could cost European economies dearly.

The remarks by ECB Vice President Luis de Guindos were an extended version of ECB President Christine Lagarde's remarks at a September policy press conference, and were similar to those made by ECB Chief Economist Philip Lane last Wednesday.

The euro rose slightly, returning to parity after such remarks, and demonstrated resistance to a strong dollar, but it was only a short-term impulse. For a stronger EUR/USD movement, larger-scale drivers are needed in the form of the Fed meeting and Lagarde's speech on Tuesday.

Focusing on monetary policy, the topic of energy resources falls out of the general list a little. Although it is quite obvious that the energy shock remains the dominant driving force behind the dynamics of inflation and the overall economic outlook, including due to the impact of a significant deterioration in the terms of trade.

Lagarde will be in focus, followed by Powell. From this, the EUR/USD pair will start dancing.

"In combination with falling commodity prices, a strong dollar and a weakening of global supply problems, we still expect a significant decline in US inflation in the first half of 2023. This, along with rising unemployment and falling job vacancy rates, should give the Fed confidence that it is on track to return inflation to the target level. However, the Fed will not want to signal any changes until it sees convincing evidence of this in the data," ABN Amro economists write.

Almost all forecasters expect a 0.75% rate hike to 3.25% on Wednesday, and prices in the interest rate derivatives markets suggest that the decision is a swing between a 0.75% increase and an exceptional 1% increase. This will lead to an increase in the upper limit of the range of federal funds rates to 3.5%.

The reaction to Lagarde may be insignificant, the market will now go on the defensive before the Fed meeting. In this regard, the technical forecast for the near future does not provide hints, and the EUR/USD pair may move into a consolidation phase before Wednesday's event.

Some analysts refrain from assuming that the Fed will raise the rate by 100 bps. After such news, the dollar lost interest for a while, but since nothing is known yet, demand continues to stay. If the Fed does not raise the rate by 1%, the euro will have a chance to rebound.

EUR/USD is trading near parity on Tuesday. Closing the session below 1.0000 may contribute to a further decline to 0.9950, and then to 0.9900.

Meanwhile, the 1.0030 level forms a key resistance before 1.0060 and 1.0100.