09.08.202304:37 Forex Analysis & Reviews: EUR/USD. Safe dollar back on top: China's trade slumps, Moody's lowers ratings of American banks

The EUR/USD pair, in the midst of an almost empty economic calendar, is trying to retreat towards the 1.09 level. This is far from the first attempt: throughout August, EUR/USD bears repeatedly tested the support level at 1.0950 (the middle line of the Bollinger Bands indicator on the weekly chart), and in some cases, they even succeeded at an operational level. Sellers pressed this price barrier a few times, but eventually retreated back to the borders of the 1.10 level. Failure to settle at the 1.09 level (not to mention testing the 1.09 target) is the main obstacle to building a downtrend. Traders remain cautious ahead of the release of U.S. inflation data, although they are demonstrating bearish sentiment.

On Tuesday, the dollar is getting stronger mainly due to the reinforcement of risk-off sentiment in the markets. Several news events contributed to this. In particular, market participants were concerned by conflicting economic reports from China, which were published during the Asian session. On one hand, the data indicated that the positive trade balance surplus in the previous month had increased to $80.6 billion (compared to $70.6 billion in June). However, it was revealed that the surplus had increased amidst a significant decline in both imports and exports. Imports contracted by 6.9% (compared to a 2.6% growth in June), while most experts had predicted a decline of 2.5%. Exports in July fell by 9.2%: this component of the report was also in the "red" (the forecast was -8.9%), while in the previous month, exports had decreased by 8.3%.

Another fundamental factor contributed to the overall risk-off sentiment. This week, credit rating agency Moody's has downgraded the credit ratings of ten small and medium-sized banks in the U.S. For example, M&T Bank's long-term ratings were lowered from A3 to Baa1. The long-term issuer rating of Old National Bancorp was lowered from A3 to Baa1. The long-term issuer rating of Amarillo National Bank was lowered from Baa1 to Baa2. The agency also downgraded all long-term ratings of Associated Banc-Corp and its subsidiary, Associated Bank. The ratings of Commerce Bank were lowered from A2 to A3. The list of banks with lowered ratings also includes Pinnacle Financial Partners, Prosperity Bank, and BOK Financial Corp.

In explaining the rating downgrades, the agency's analysts pointed out that banks are facing increased risks related to interest rates and the management of their assets and liabilities. It is noted that banks' profits in the second quarter "reflected a significant increase in funding costs." According to analysts, "the results of many banks showed growing pressure on profitability, which will reduce their ability to generate internal capital."

I'd like to remind you that last week another credit rating agency, Fitch, downgraded the long-term default rating of the United States issuer from "AAA" to "AA+". Among the reasons for this decision were deteriorating budget indicators and rising national debt. During the wave of increased risk aversion, the greenback also strengthened across the market.

Tuesday's news background has heightened interest in the safe-haven dollar, which led to EUR/USD sellers once again testing the 1.0950 support level. However, despite the swift price decline, one shouldn't be too quick to trust the downward momentum.

Take a look at the daily chart of the pair: since July 28, EUR/USD sellers have tested the 1.0950 level for six days (which practically means almost every trading day in August) and/or attempted to settle below this target. And - unsuccessfully at that.

It's quite likely that Tuesday's downward movement will also conclude with an upward rebound. In my opinion, the pair will trade within the range of the 1.09 level until the Consumer Price Index (scheduled for Thursday, August 10). On Monday, comments from Federal Reserve council member Michelle Bowman once again brought up the topic of a rate hike at the September meeting. The Fed official suggested further tightening of monetary policy parameters to bring inflation back to target levels. However, her rhetoric included a somewhat ambiguous formulation - Bowman stated that the Bank may need another rate hike. According to her, the recent inflation data (for June) "were positive," but the Bank requires clear evidence that inflation is consistently decreasing to the target 2% level.

Given this disposition, one clear conclusion can be drawn: the U.S. CPI report for July will have an extremely important, one might say, determining value for dollar pairs. In such circumstances, it will be quite challenging for EUR/USD bears to keep the pair below the 1.0950 level, let alone test the 1.0900 mark or establish themselves below this target.

Therefore, we should be cautious towards the current downward momentum. It's important to remember that all previous attempts to settle at the base of the 1.09 level have failed.