28.05.202207:08 Forex Analysis & Reviews: Dollar drawn into the elimination game, and the euro decided to hedge in advance

At the end of this week, the US currency has been struggling to overcome the negative trend. The dollar index failed, creating tension in the markets. At the same time, the European currency remains relatively stable.

On Friday, May 27, the greenback collapsed to a one-month low against major world currencies. The reason is the uncertainty of market participants regarding the Federal Reserve's interest rate hike. Investors and traders fear that in the second half of the year, the US central bank will slow down or suspend the running cycle of tightening of the monetary policy.

According to the results of the Fed's May meeting, a majority of votes decided to raise rates by 50 basis points (bp) at meetings in June and July. At the same time, market participants have included these two rises in prices (by 0.5% each), believing that the central bank will stop there and will not adjust the current plan.

Against this background, the appetite for risk has increased, which is why the US currency has lost the lion's share of its achievements. The greenback fell to the lowest level recorded at the end of April. With regard to the single currency, the situation has hardly changed, since the European Central Bank's assurances about the upcoming rate hike serve as insurance for EUR. As a result, the EUR/USD pair was trading at 1.0709 on Friday, May 27.

In the current situation, the pair took advantage of the selling pressure on USD. A day earlier, on this wave, the EUR/USD pair rose to 1.0765, the highest level in a month, and then moved into the consolidation phase. Experts believe that the pair will finish the second week in positive territory.

The concern of market participants caused a significant drop in the dollar index (USDX) to 101.43, which measures the USD exchange rate against a basket of six key currencies. According to experts, this happened for the first time since April 25, 2022. As a result, the demand for the dollar as a safe haven currency was undermined. By the end of this week, the decline in the USDX was 1.49% (after falling by 1.37%), recorded last week. According to analysts, this is the first two-week reduction in this indicator since the beginning of 2022.

Earlier, the dollar index reached a 20-year peak, exceeding the threshold of 105, but later capitulated. Experts believe that the reason for this is market concerns about a possible slowdown in economic growth against the backdrop of tightening of the Fed's monetary policy.

At the end of the week, cautious sentiment prevailed in the markets, so USD bulls reduced activity. This negatively affected the dynamics of the dollar index. A serious drop in the yield of US Treasury bonds added fuel to the fire.

The markets are focused on the upcoming reports on the US Personal Consumer Spending Price Index (PCE), which are under the close attention of the Fed. Additional information will come from the U.S. Bureau of Economic Analysis. The agency will provide information on personal income and expenses of American consumers for April, supplementing them with the University of Michigan consumer sentiment index for May.

For market participants, these statistics are very important, since the Fed focuses on them when analyzing the current level of inflation. If the peak of inflation is passed, the pressure on the US currency will increase. At the same time, a slowdown in price growth will allow the central bank to reduce the pace of tightening of the monetary policy. According to analysts, the Fed will need to take a pause in the process of raising rates to assess the consequences of tightening the monetary policy for the country's economy.