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06.04.202208:18 Forex Analysis & Reviews: Dollar has become an ally of the Fed, and the euro is far from progress

The US currency has gained momentum again, bypassing the European one. Attempts by the euro to demonstrate leadership over the dollar stumble upon the confident strength of the latter. The Greenback is trying to strengthen its positions, and these efforts are quite successful.

In the middle of this week, the US currency rose to a two-year high amid the statements of the Federal Reserve. According to Lael Brainard, a representative of the Fed, the best option for US monetary policy will be a combination of factors such as an increase in interest rates and a quick completion of the balance sheet. This will help the US monetary policy "maintain a neutral position," Brainard stressed.

At the same time, the politician did not rule out further tightening of the monetary policy, to which the central bank may resort as necessary. An important reason for such tightening is the strengthening of inflationary pressure. In the coming months, an increase in consumer inflation is possible in the United States, experts warn. In such a situation, changes in the monetary policy are advisable.

On a wave of confidence, the greenback rose to the highest level recorded in the last two years. At the same time, the euro, its rival for the EUR/USD pair, is still under pressure due to new anti-Russian sanctions. According to Commerzbank economists, the euro's position is shaken by the risks of stopping the import of a number of energy products and a complete energy embargo.

According to experts, the high probability of changes in the monetary policy by the European Central Bank will do little to help the single currency. The euro is "running out of steam" and often goes off course. The euro may be supported by growing expectations of a tightening of the monetary policy by the ECB. It should be noted that now European leaders are ready to complete the experiment with an interest rate below zero. This measure is necessary to curb galloping inflation in the eurozone, experts believe.

The current situation destabilizes the EUR/USD pair, which consolidated near the support level of 1.0960 on Tuesday, April 5. The pair has to make a lot of efforts to keep some of the positions won. However, the further escalation of the geopolitical conflict prevents this. On the morning of Wednesday, April 6, the EUR/USD pair sank to 1.0897, and this is not the limit.

Against the background of individual signals of a new escalation of the conflict, investors are once again trying to turn to dollar assets as a time-tested means of protection. In such a situation, the greenback has every chance to strengthen. According to analysts, USD will prove itself in the near future.

The dollar is significantly supported by the yield of two-year US government bonds, which is at the highest level since January 2019. The yield of five-year US bonds is not far behind it, which has taken the highest position since December 2018. Against this background, the greenback has gained confidence, which it seeks to maintain for a long time.

According to currency strategists, not only geopolitical risks contributed to the decline of the EUR/USD pair, but also the long-term hawkish attitude of the Fed associated with tightening monetary policy. The situation is complicated by a further rise in inflation and growing problems with supply chains. Central banks have to act in the mode of accelerated curtailment of the quantitative easing (QE) program and turn to tightening the monetary policy. At the same time, analysts believe that the leading central banks are doing too little and too late. However, the chance for further normalization of the situation remains high, experts believe.

Larisa Kolesnikova,
Analytical expert of InstaSpot
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