06.07.202209:21 Forex Analysis & Reviews: Dollar adjusted its crown, pushing the hopeless euro aside

The US currency is in an uptrend, fueled by fears of a recession and maintaining the status of a safe haven asset. At the same time, the European currency has to make a lot of efforts not to finally go to the bottom.

On the morning of Wednesday, July 6, the dollar exchange rate remains at a 20-year peak against the euro and at multi–month highs against other key currencies. Factors such as the rapid flight from risk by market participants, high gas prices in Europe and growing fears of a recession contributed to this. As a result, investors massively rushed to safe-haven currencies, primarily to the greenback. This helped the latter to strengthen significantly. At the moment, the dollar, having adjusted its crown, proudly looks at less successful rivals in the financial market.

At the beginning of this week, global markets were gripped by volatility, which supported a reliable protective asset – USD. The euro had a much worse time: its growth is hampered by concerns about the eurozone economy. And so the euro-dollar exchange rate fell below 1.0300, being in this range for the first time since the beginning of this month.

At the moment, the euro has collapsed against the dollar to its lowest level since 2003. In relation to other major currencies, the euro does not have any success either. Adding fuel to the fire is a sharp rise in the cost of energy in the eurozone, the price of which rose after reports of the blocking of a key gas pipeline for transit from Russia.

The current situation contributed to the decline of the EUR/USD pair, which is sensitive to price fluctuations and a possible recession in the eurozone. The main victim in the classic pair is the euro, because, unlike the greenback, it has no points of support. On the morning of Wednesday, July 6, the EUR/USD pair was trading near the low level of 1.0248. According to currency strategists at UBS Capital Markets, the current state of the EUR/USD pair indicates the proximity of parity between the euro and the greenback.

If the demand for safe assets increases in the financial markets, the EUR/USD pair will remain under bearish pressure. According to analysts, the craving for risk still affects the dynamics of the classic pair.

Currently, financial markets are once again overestimating the number of interest rate hikes that the Federal Reserve and the European Central Bank will carry out in the coming months. The revision of previous plans mainly concerns the latter. The deterioration of forecasts regarding the ECB's actions contributes to the depreciation of the euro against the greenback. Against this background, some banks also change their strategy and provide their clients with rates on the EUR/USD pair below parity. At the same time, specialized money transfer providers trade major currencies near the 1.0200 mark.

In the face of the current recalibration, the yield of ten-year German government bonds has sharply decreased. Its decline hinders the euro's growth, as investors are looking for higher returns in other currency instruments. The single currency is tripped up by statements from ECB representatives, which is why the central bank does not look interested in strengthening the EUR. At the same time, Madis Muller, a representative of the ECB Governing Council, and Vice President Luis de Guindos consider it appropriate to raise the rate by 25 bps in July.

Today, the market is focused on the release of the minutes of the Fed's June meeting, following which the central bank immediately raised the rate by 75 bps for the first time since 1994 (up to 1.5-1.75% per annum). First of all, investors are interested in what measures the central bank will take to minimize the risks of recession. At the same time, most analysts (86%) believe that following the results of the July meeting, the discount rate will be increased by another 75 bps, to 2.25-2.5%.