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At the start of the week, the US currency tends to go to the kings, but it is not easy for it to regain its leadership positions. Experts assume that the greenback will drift, while the euro will take advantage of the situation. Note that attempts to grow the latter were quite successful.
Last week, the greenback recovered previous losses, but failed to rest on its laurels. On Monday, May 30, the greenback fell into a downward spiral, having noticeably dipped over the past five months. The reason is the disappointment in the "life-giving" ability of interest rates to influence the American economy. Previously, market participants believed that the increase in the Federal Reserve's key rate contributes to a further economic recovery in the US, but now they have revised their views.
The change in market sentiment had a negative impact on the dynamics of the USD. However, the decline in greenback began last Friday, May 27, after the publication of data on core inflation in the US. According to the core price index (PCE), in April, the annual inflation rate in the country fell to 4.9%, which coincided with analysts' forecasts. Note that in March, PCE showed a price increase of 5.2% year on year.
The current weakening of the greenback is facilitated by a long rally in the US stock exchanges. Recall that at the end of last week the exchange market was actively recovering, demonstrating the growth of quotes by 3.33%. The current situation played into the euro's hands, which went to the next peaks. The euro's attempts were mostly successful. EUR/USD was trading near 1.0756 on Monday morning, May 30, trying to move higher.
Many analysts believe that amid tighter financial conditions and risk aversion, the pair could slide below the 1.0700 level. Existing risks are capable of directing the EUR/USD pair towards correction and further decline in case of renewed flight to the dollar by investors. At the same time, experts do not rule out a high probability of USD recovery from current levels, and not a continuation of the fall. The reasons for such confidence are that the tightening of the monetary strategies of the Fed and the European Central Bank is already included in market prices.
The current situation is undermining the euro's position, which is stubbornly striving to become a leader. The euro rally will end near 1.0800 soon, currency strategists at National Australia Bank said, as the market prices three ECB rate hikes of 0.25% in 2022. In the future, the bank's analysts expect the parity of the dollar and the euro. A similar scenario is possible if the EU imposes an embargo on the import of Russian oil. This is fraught with serious problems for the eurozone economy, since Russia may respond with restrictions on gas supplies to the EU.
This opinion is shared by JP Morgan bank specialists, who maintain short positions on EUR amid fears of stagflation or recession in the eurozone, as well as due to high inflation in the region. Earlier, the bank's currency strategists announced a deterioration in the prospects for economic growth in the US, against which the greenback is able to lose ground. At the moment, the USD has dipped, although fears of a global recession have receded slightly.
According to JP Morgan analysts, in the medium and long term, the US currency will remain strong against currencies with a high beta coefficient, which reflects the volatility of an individual asset relative to market dynamics. These currencies include the Japanese yen. According to the calculations of JP Morgan specialists, in the short term, the reduction in yields of treasury government bonds puts pressure on the USD against the yen. Now the greenback takes a wait-and-see position, which can change at any time.
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