20.06.202309:22 Forex Analysis & Reviews: USD ready to fight back?

The US dollar is trying to recoup its early losses and is doing well so far. Now its chance to recover against the euro is rather high. Some of its attempts to take revenge have failed, but this is a temporary slowdown, experts believe. The greenback is gradually gaining momentum, reclaiming highs it has early given up to the euro.

On Tuesday morning, June 20, the American currency traded almost unchanged against the euro ahead of the macroeconomic release from the US. Later, market participants expect reports on the US housing market. According to preliminary estimates, the number of new buildings in the country has barely changed compared to April this year, decreasing to 1.4 million from the previous 1.401 million.

The markets' focus is on Jerome Powell's testimony before the US Congress which is scheduled for June 21-22. Analysts expect signals from the Fed Chairman about the future direction of the regulator's monetary policy. Comments by the Fed Chair could affect the dollar's exchange rate.

The upcoming semiannual report by Jerome Powell is of crucial importance to the greenback. Currency strategists at MUFG Bank believe that the comments by the Fed's head will be similar to those discussed at the FOMC meeting last week. "The updated dot plot showed that the majority of Fed representatives favor two more rate hikes until the end of 2023," the bank emphasizes.

However, the US rate market still has doubts about the Fed's two more rate hikes. At the same time, market participants admit there might be a rate increase of 25 basis points in September this year.

MUFG Bank believes that the implementation of the Federal Reserve's plans will be hindered by "growing evidence of disinflationary pressure in the US." This may weaken the greenback as the current Fed's strategy may acquire a dovish tone.

Currently, the greenback has reclaimed some of its lost positions. The American currency has slightly pushed back the euro but it is still too early to claim the victory. According to currency strategists at Scotiabank, the dollar's rise will continue but will be unstable. The greenback will "remain sensitive to macro data from the US, especially to negative surprises."

Confident growth of the American currency may be hindered by a 25 b.p. rate hike in several developed countries such as the UK, Norway, and Switzerland. Despite substantial support for USD from the Fed, it will weaken against the backdrop of further inflation growth. A less hawkish tone displayed by Fed representatives adds fuel to the fire.

It should be noted that periods of high inflation are usually synchronous with the wave of unemployment, which provokes a recession. Therefore, despite the decrease in the headline inflation, it is extremely difficult for the regulator to return it to the target of 2% while avoiding an increase in unemployment. Specialists believe that stagflation, characterized by rising prices and increasing unemployment, awaits the United States in the near future.

Against this background, specialists expect further depreciation of the greenback. According to Danske Bank economists, the EUR/USD pair will be in a downtrend as long as "inflation persists globally."

At the beginning of this week, the pair was trading within an ascending regression channel near the level of 1.0900. According to the technical chart, this level serves as strong support for the EUR/USD pair. The Fibonacci correction level of 61.8% from the recent downward trend and the 20-day period Simple Moving Average (SMA) form the boundaries of the channel.

On Tuesday morning, June 20, the EUR/USD pair was holding near the 1.0926 mark, trying to break through the existing range but without any success.

If EUR/USD pulls back to 1.0900 and below, this level will become a resistance zone. If so, this will pave the way for a downward correction to 1.0850 (the lower boundary of the ascending channel, the Fibonacci level of 50%).

Against this backdrop, currency strategists at MUFG Bank expect the EUR/USD pair to drop to 1.0600 in the next 6-12 months. At the same time, analysts assess the prospects of the American economy as more positive compared to the European one. According to MUGF Bank, the EUR/USD pair will stay under pressure in the second half of the year. However, in the long term, the greenback will continue to weaken as markets anticipate a peak in the US rate-hiking cycle.