02.09.202110:29 Forex Analysis & Reviews: EUR strengthens against USD

At the start of the trading week, the euro strengthened against the greenback. On September 1, EUR/USD is trading well above 1.1800. An increase in demand for the euro came amid a rise in its purchases. When traders stop buying, EUR falls.

Early on Thursday, September 2, EUR/USD was trading around 1.1845. The currency received strong support from the eurozone's consumer prices for August. The CPI accelerated to 3.0% from 2.2% y/y. The core CPI increased to 1.6% versus 0.9% y/y. The indicator rose to its record level unseen since 2012. Promising unemployment results in the euro area for July also boosted the European currency. The indicator fell by 7.6% to the low of May 2020, when the unemployment rate came at 7.5%.

The current fundamental background provides strong support to the euro. In this light, the ECB may approach its inflation target. Moreover, there will be no need to reduce the quantitative easing (QE) program so soon. Strong institutional demand for bonds in Greece and Germany provides additional support to the European currency. As a result, the euro returned to its monthly high as rising inflation contributed to a spike in bond yields. Under the circumstances, EUR/USD may extend its rally with the target seen at 1.1900 or above.

According to analysts, strong macroeconomic results in the eurozone give the regulator more reasons to begin tapering. The EBC is likely to discuss such a possibility during the meeting scheduled for September 9, where it may decide to tighten monetary policy.

Meanwhile, the greenback has been making attempts to recover for several days. A decrease in consumer confidence by 15 points pushed the US dollar further down. In August, the indicator fell to its lowest level since 2011.

Meanwhile, the ISM Manufacturing PMI advanced to 59.9% in August from 59.5% in July, compared with market expectations of a 58.6% fall. The ADP employment change report logged a 374K increase in jobs in the previous month, compared with market expectations of a 613K rise. Against this backdrop, the greenback went down.

At the same time, the US dollar still has growth potential. Nordea Bank strategists believe that the downward trend in USD will stop after the government debt ceiling is increased. On August 1, the debt ceiling came into effect in the United States. It temporarily prohibits the Treasury Department from raising new loans. However, when the ceiling is increased, the Treasury will have to sharply rise in the volume of loans to replenish stocks. This may shrink liquidity and strengthen the greenback. Alternatively, the likelihood of USD plunging by the end of 2020 may increase when the forex market has to revise previous measures and accept that an interest rate hike may not happen soon.