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US data surprised the markets this month and fueled risk appetite. The first most emotional reaction has passed and now market players are thinking about what really happened and what to expect from the dollar in the future. The beginning of a downtrend or it seemed?
The positioning of the euro and the pound will depend on which path the dollar chooses. If the greenback maintains the uptrend and, moreover, rallies again, the GBP/USD pair will go below 1.2000, and the EUR/USD quote will again reach parity.
So what about the dollar?
The dollar index experienced downward pressure around 106.00 ahead of the release of inflation data. Then there was additional weakness amid increased sales, which led to testing the 105.00 mark.
Judging by the picture observed today, the struggle for the 105.00 level is underway. If it is not held, a deeper pullback will follow. However, this requires additional factors or convincing comments from the Fed.
The short-term constructive stance is expected to remain supported by support level at 104.50.
The downside potential for the dollar appears to be limited. This opinion is shared by the majority of currency market experts. After a short correction, the dollar bulls will once again take the lead. According to Nordea, this is not the beginning of a downtrend.
The likelihood of a 75 bp Fed rate hike declined in September, now the markets are waiting for a 50 bp increase. The Fed has not yet completed its rate hike cycle to change its mind about the dollar so drastically. Members of the regulator speak about this in plain text and warn market players against self-deception. It's too early to start talking about monetary easing, which is what the markets are beginning to hope for. Passing the peak is possible, but the US has not beaten inflation, the numbers remain excessively high and it is not known what will happen tomorrow.
Markets will continue to bet on further policy tightening. According to the head of the Minneapolis Fed, Neel Kashkari, nothing has happened that would change the need to raise the rate to 3.9% by the end of the year and to 4.4% by the end of 2023.
The return of the dollar to positive territory suggests that the euro will fall to parity in the coming weeks. There is reason to believe that the matter will not end with the achievement of parity, as the economic performance of the United States is superior to that of European economies, which are expected to enter a recession.
According to Nordea analysts, the first slowdown in inflation does not change the rules of the game, «We are far from the Fed's dovish turn and haven't yet reached the peak for the dollar».
Winners and losers in the currency sphere will be determined by the method of raising rates by the Central Bank. The Fed will still outplay other regulators. However, when the Fed hits the peak of hawkish sentiment, currencies like the yen are sure to recover some of their losses, but that's out of the question right now.
The American economy is much stronger than many think. It is already clear that the arguments in favor of a recession in the US are limited, which cannot be said, for example, about the eurozone economy.
Given the current picture, the Fed will raise rates by 50 bp in September and November, and then by 25 bp in December. The ECB is due to raise rates by 50bp in September and October before cutting it to 25bp in December. This forecast is given by Nordea economists.
The 10-year US Treasury yield is expected to reach 4% in 2023, while the German 10-year yield will have to settle for 2%. Such prospects worries investors as Europe could be hit much harder by high energy prices and natural gas shortages and enter a recession in the second half of the year. The US economy, by comparison, is at risk of slowing down due to limited spare capacity.
According to Nordea analysts, the EUR/USD pair will fall below parity to bottom at 0.9700 in early 2023. On Thursday, after the fall, the pair managed to recover positions and rise to 1.0300, but was so unsteady. In order to continue the rally, EUR/USD buyers need to overcome the tough resistance at 1.0370, which is almost unrealistic.
The key resistance is the level of 1.0370. If it stops in support, the euro will have a chance to besiege the level of 1.0400, then test the level of 1.0450.
As an intermediate level of support before 1.0230 and 1.0200 is the mark of 1.0300.
As for the GBP/USD pair, according to Nordea's forecasts, its rate will fall below the 1.2000 mark and end the year at 1.1800.
Today, the pound has entered a phase of consolidation after an impressive rally on Wednesday. The bullish sentiment will continue as long as the buyers control the 1.2170 level. If the market sentiment deteriorates, it will be difficult for the GBP/USD pair to develop growth.
There is strong support at 1.2170. If the quote falls below, the bears will become active and pull the pound down, first to the level of 1.2150, then to 1.2100.
At the same time, the next important obstacle is the level of 1.2275. Further - 1.2300, 1.2350 and 1.2400.
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