29.06.202123:20 Forex Analysis & Reviews: EUR/USD: Fed has released the genie from the bottle, it is already difficult for the dollar to restrain a smile, the euro risks incurring losses

As soon as the main currency pair recovered from the shock caused by the hawkish shift of the Federal Reserve, a new attack came in the form of a delta variant of the coronavirus, the widespread spread of which in the eurozone threatens to undermine the fragile economic recovery in the region.

Now all eyes are focused on the UK, which is distinguished by the largest proportion of the vaccinated population in Europe, but also by the highest growth rate of the number of cases on the continent. Depending on the outcome of this wave, the example can become both the main proof of the effectiveness of government measures, and vice versa.

On Tuesday, the greenback went on the offensive in a broad front, moving in the direction of recent highs reached around 92.40 points. At the same time, the EUR/USD pair plunged below the 1.1900 mark, approaching the 2.5-month lows recorded on June 18 in the area of 1.1850.

The expansion of the yield spread of 10-year US and German government bonds plays in favor of strengthening the dollar against the euro.

The fact that the European Central Bank can afford to maintain a soft policy much longer than the Fed does not add to the optimism of the single currency.

The greenback is also supported by the demand for the safe haven asset against the background of increasing concerns about the deterioration of the epidemiological situation in Europe due to the increase in the incidence of a new delta strain of COVID-19.

Experts admit that the strengthening of the dollar may gain momentum ahead of the publication of the monthly report on changes in the number of people employed in the non-agricultural sector of the United States on Friday.

Data on the labor market are key for the Fed's policy, along with inflation indicators. It is the dynamics of employment that will largely determine when the central bank will begin to curtail the large-scale incentives introduced at the peak of the coronavirus pandemic.

According to the consensus forecast of economists polled by Reuters, the US Department of Labor will report the creation of 690,000 jobs in June, compared with 559,000 in May, and the unemployment rate will be 5.7% against 5.8% in the previous month.

Last week, Fed Chairman Jerome Powell said that there is still a long way to go to a comprehensive recovery in the labor market, so monetary support is still needed.

The president of the Federal Reserve Bank of Minneapolis, Neil Kashkari, also spoke in a similar vein, noting that although the American economy is at the beginning of a powerful recovery, it still has a long way to go to regain the jobs lost during the coronavirus pandemic.

"Now we are only at the beginning of what I hope is a very powerful recovery, but we are still in a deep hole, since the number of jobs in the economy is about 7 million less than it was before the pandemic began," Kashkari said.

Meanwhile, the head of the Federal Reserve Bank of Boston, Eric Rosengren, expressed his readiness to discuss the curtailment of measures to support the American economy, partly due to fears that extremely cheap loans could destabilize it.

"It is definitely time to start thinking about how quickly it will be advisable to abandon the incentive measures," Rosengren said. At the same time, he did not specify the time frame in which, in his opinion, this may happen.

A confident improvement in the state of the labor market may cause a new round of talk that the Fed may move faster to a tighter monetary policy than the leadership of the US central bank has so far stated.

The euro should weaken even more against the US dollar in the second half of the year, as the ECB maintains its extremely soft policy, while the Fed is approaching the moment when it will begin to reduce monetary support for the economy, experts at Nordea Asset Management believe.

"The Fed considers the recent increase in inflation to be a temporary phenomenon, but it may eventually face higher and permanent inflationary pressures. This means that the hawkish bias of the central bank, indicated at the June meeting, is likely to continue in the third quarter. The ECB mainly faces temporary inflationary effects and therefore can afford to print money longer than the Federal Reserve, which will lead to a decline in the EUR/USD exchange rate," they noted.

Previously, investors bought the single currency against the dollar on the assumption that the latter should weaken by the end of this year against the background of synchronized global growth. However, now the euro looks vulnerable to the termination of reflationary trading and may soon test new multi-month lows against the greenback in light of the fact that the new COVID-19 strain will become widespread throughout the European continent.

"The market took a long position on EUR against USD amid optimism about vaccination in the eurozone. However, disappointing forecasts about the likely spread of a new strain in Europe in the summer months may undermine the confidence of players in this trade," Rabobank strategists said.

"Meanwhile, the Federal Reserve has released the genie from the bottle, mentioning the possibility of raising rates in 2022. If the US statistics remain generally favorable, we expect a moderate growth of USD against EUR during this year," they added.

The bank revised the forecast for EUR/USD for a month downwards (from 1.2000 to 1.1900), and left the estimate unchanged for 3 and 6 months – at the level of 1.1900 and 1.1700, respectively.

Commerzbank analysts maintain a bearish mood for the main currency pair, expecting its decline to the March low near 1.1704.

"The forecast for EUR/USD remains negative. The pair continues to aim for 1.1847 (June low) and 1.1836-1.1824 (early March low and the Fibonacci correction level by 78.6%). This situation will continue as long as the pair is trading below the 200-day moving average at 1,1999. Further down, there are 1,1738 (April 5 low) and 1,1704 (March low). Above the 200-day moving average, resistance was noted at 1.2052 (mid-May low) and 1.2087 (55-day moving average)," they said.