20.07.202208:42 Forex Analysis & Reviews: The dollar is in conflict with oil, and the euro is optimistic before the ECB meeting

The US currency had to slow down a bit, giving way to the European one, which spread its wings ahead of the European Central Bank meeting. However, the euro should not be in euphoria, and the dollar should not be self-confident, analysts believe. At the same time, the dynamics of the latter is in contradiction with oil quotes, causing concerns about the raw materials market.

The greenback partially surrendered its positions on Wednesday, July 20, allowing the euro to move up. The latter was given strength by the upcoming ECB meeting, at which a decision on the interest rate is expected. According to ABN Amro economists, the markets expect the ECB to raise the key rate by 25 bps. In addition, two important issues will be raised at the meeting – the further trajectory of rate hikes and consideration of a new tool to combat fragmentation.

The ECB has doubts about the future rise in interest rates, namely in September 2022. However, ABN Amro believes that "the September increase will be a step of 50 bps" if the medium-term inflation forecast remains at the same level. At the same time, in the autumn and until the end of this year, a "gradual but steady increase in rates" by 25 bps is possible.

The current situation contributed to the euro's steady growth, which had soared by 1% a day earlier on statements that the ECB leadership would discuss the possibility of increasing the key rate by 50 bps at once. The EUR/USD pair was trading at 1.0234 on Wednesday morning, July 20, playing back previous failures. To date, the pair has exceeded the psychologically important level of 1.0200, increasing its weekly growth to 1.50%.

According to preliminary data announced by Reuters, the ECB will consider both options: raising rates by 25 bps and 50 bps. At the last meeting, the ECB allowed the rate to rise by 25 bps in July and the possibility of further increases in September. However, market participants and analysts do not rule out a more aggressive tightening of the monetary policy amid a rapidly growing inflation. Recall that in the first month of summer, consumer prices in the eurozone soared by 8.6% year-on-year after rising by 8.1% in May.

Analysts believe that its fair price plays in favor of the euro, while the dollar becomes overbought. This prevents the latter from growing and conquering the next peaks. The greenback's dynamics is under pressure from being overbought, experts emphasize. In the coming week, analysts expect a correction of the US currency, against which market participants will expect further actions by the Federal Reserve on the rate. The current forecasts regarding the Fed's interest rate hike are the main driving force of the market.

In case of a rise in the price of the greenback, the raw materials sector is experiencing the greatest difficulties. The recent downward trend recorded in the hydrocarbon market demonstrates investors' fear of a possible recession. Market participants fear that the current downturn in the economy will lead to a reduction in demand for raw materials. Experts consider the fact that most commodities are valued in dollars to be another important reason for the decline in the oil market. Take note that the price of benchmark Brent oil peaked in June, and in dollar terms, raw material prices increased by 59%.

As the USD rises in price, the global commodity market also increases in value, increasing pressure on demand. Strengthening the greenback not only increases the cost of buying raw materials outside the US, but also encourages foreign producers to sell stocks. The reason is that after converting dollars into national currencies, the incomes of oil producers are steadily growing.

The rapid rise of the US currency is able to bring down the hydrocarbon market, experts believe. The current conflict between the USD and the commodity sector is a confirmation of this difficult relationship. According to analysts, the correlation of greenback and oil has always been accompanied by difficulties. Such disagreements put significant pressure on demand. According to International Energy Agency (IEA) estimates, a strong USD, combined with record-high fuel prices, is helping to reduce demand in developing countries.