- The EUR/USD rate remains stable under downward pressure below the parity rate though, there is little hope that even a significant hike in interest rates might rescue it.
- The euro-dollar pair's losses this week reached the support level of 0.9900, the lowest in 20 years, and it is settling around the 0.9970 level at the time of writing the analysis.
- The currency pair may remain stable around its losses until important and influential events, led by the announcement of the US economic growth rate today, and then the Jackson Hole symposium.
Rather than monetary policy, it is the interrelated threats of a recession and a Russian energy halt that are weighing on the single European currency - the euro -, according to analysts. Although traders are now preparing for a one-percentage point rate hike by October, such dynamics are difficult for the ECB to contend with, even if it uses the kind of massive moves in borrowing costs that the Federal Reserve recently enacted.
Investors are boosting the European Central Bank's bets and are pricing in one point of the gains by October. “Price has not been in the driving seat in the forex markets, particularly in the last month – and it really is about the dynamics of global growth,” said Sam Ziv, FX analyst at JPMorgan Private Bank. They are not supportive of currencies when they are made to keep inflation expectations steady and hurt growth expectations at the same time.”
Borrowing Costs are Raised
Facing the fastest rate of inflation since the introduction of the euro, the European Central Bank raised borrowing costs for the first time in more than a decade last month, raising its deposit rate by half a point to 0%. As investors anticipate another move of this magnitude on Sept. 8, storm clouds are converging over the 19-nation eurozone economy, as the cost-of-living crisis and Russia's invasion of Ukraine put pressure on households and businesses.
Business surveys released Tuesday by S&P Global showed activity contracting for a second month, with the pandemic rebounding in areas like tourism almost to a halt. Meanwhile, a weak euro, which hit a two-decade low against the dollar this week, is boosting inflation by making imports more expensive - a particular concern when most of the region's inflation is driven by energy that is largely priced in dollars. The bleak background means that even an unprecedented three-quarters of a point rate hike will not beneficially boost the euro, according to Dirk Schumacher, economist at Natixis in Frankfurt.
Indeed, ECB Executive Board Member Fabio Panetta on Tuesday urged caution in planning next steps as the prospect of a downturn in the eurozone becomes more likely than ever. "If we had a big slowdown or even a recession, that would ease inflationary pressures," he added at a panel discussion in Milan. However, colleague Isabel Schnabel acknowledged the negative impact of a weak currency on inflation expectations, telling Reuters that it is all the more important when the economy faces an energy price shock. Money markets priced a half-point increase next month and put odds of 20% at 75 basis points. Moreover, traders are betting 130 basis points to tighten by the end of the year, with the deposit rate eventually rising to 2% by September 2023.
Euro forecast against the dollar:
I still see that the EUR/USD may hold on to its recent losses until the reaction from the Jackson Hole symposium. It is clear that he is ignoring the results of the US economic data and focusing more heavily on that seminar. The general trend of the EUR/USD pair is still bearish and stability below the parity price will move the bears towards stronger support levels, the closest to them currently are 0.9920, 0.9855 and 0.9790, respectively.
On the upside and according to the performance on the daily chart, breaking the resistance 1.0200 will be important to breach the sharp bearish channel recently. Today, the euro will be affected by the announcement of the growth rate of the German economy, along with the reading of the Ifo index, and the US dollar will be affected by the announcement of the growth rate of the US economy and the number of jobless claims.
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