The greenback strengthened by almost 0.2% at the end of last week. This was largely due to the increased demand for safe haven assets, caused by concerns about an increase in the incidence of a new variant of coronavirus in the world, which can slow down the recovery of the global economy.
Meanwhile, the EUR/USD pair suffered losses for the second week in a row, updating the three-month low around 1.1750 and ending last week slightly above it. This, in turn, was caused by the fact that the ECB confirmed its dovish position.
This week, traders will focus on the upcoming meeting of the Federal Reserve, which is scheduled for July 27-28. After the meeting, a press conference will be held by tFed Chairman Jerome Powell. Investors will be waiting for comments from the US central bank on the situation in the national economy and hints about its future plans for monetary policy.
There will be no update of the "dot chart" at the Fed meeting this month, so officially, FOMC participants will still expect two rounds of interest rate hikes (25 bps each) in 2023, Rabobank experts note.
"While upward risks to inflation may lead to another upward shift of the dot graph, downward risks as a result of prolonged exposure to COVID-19 may still push it in the opposite direction," they said.
The greenback has gained almost 1.5% since the Fed signaled an earlier-than-expected increase in interest rates.
The Commonwealth Bank of Australia predicts that the dollar may continue to strengthen this week if the Fed moves closer to reducing QE at the end of its two-day monetary policy meeting on Wednesday.
"If the FOMC removes the term "significant" from its final communique, describing the progress of labor market conditions before the withdrawal of monetary support, it will signal that the regulator believes that it will soon be appropriate to reduce asset purchases," CBA experts said.
Strategists at Morgan Stanley believe that the Fed's optimistic assessment of the US economy and the continuation of discussions on reducing QE may seem hawkish to the market. This will be good news for the greenback.
The main risk for such a prospect is the increase in the number of cases of COVID-19 in the United States after the US Central Bank at its last meeting refused to mention the coronavirus as a brake on the national economy.
"The Fed is likely to maintain a neutral position before the Jackson Hole symposium at the end of August, while the risks are shifted towards a dovish reaction against the background of the spread of the delta variant of the coronavirus in the United States," analysts at Mizuho Bank believe.
"Following the results of the June meeting, the FOMC indirectly announced victory on the front of the fight against COVID-19. However, the spread of a new strain of the Delta virus in the United States and a slowdown in vaccination in the country may change the Fed's mood this month," Jefferies experts said.
"In any case, the tone of the FOMC statement and the press conference of Powell is likely to be more dovish than at the June meeting," they added.
According to experts, any cautious statements by the Fed chairman about the economy can lead to a sell-off of the dollar, which does not promise to be long, as the regulator is approaching the normalization of policy.
"From the May lows, the greenback has grown by about 3.5% and is again trading at the levels that were before last year's US presidential election, between 92.00 and 94.00. We believe that the US currency will continue to be in demand for the rest of the summer, as concerns about global growth and the tightening of the Federal Reserve policy will remain in the spotlight," said strategists at MUFG Bank.
Attempts to increase EUR/USD fade quite quickly in the area of 1.1800, demonstrating that the "bears" are still in control of the situation.
The COVID-19 "Delta" strain continues to spread across the Old World, leaving the euro under pressure.
The number of cases of coronavirus in the US is also growing, but the safe dollar benefits from the flight from risks.
In addition, according to Westpac analysts, the United States has more opportunities to resist the spread of the Delta variant than other countries, thanks to the active vaccination that took place earlier.
Another positive factor for the dollar is the divergence in monetary policy between the US and European central banks.
While the Fed is on course to reduce the volume of liquidity, the ECB printing press continues to work at full capacity.
Last week, the ECB confirmed its dovish position.
"We expected that the July meeting of the ECB would be held without any special surprises and would bring a rather "dovish" result. That's about what happened. Following the results of a comprehensive policy review, the regulator decided that it had learned its lesson and would not prematurely tighten the course, in the words of its head, Christine Lagarde. The ECB also unveiled a new symmetrical inflation target of 2%, with exceptions for transitional periods of higher inflation. Despite a couple of votes against, Lagarde said that the new statement was supported by an overwhelming majority. Probably, the Central Bank will soon give new instructions on buying up assets in order to remove concerns about stopping the PEPP program next spring," Saxo Bank experts said.
As for the Fed, on the one hand, the coronavirus is holding back the recovery of the American economy, but on the other hand, its growth is strong, and inflation in the country is at uncomfortably high levels, according to the chairman of the Federal Reserve, J. To Powell.
Most investors expect that following the results of the July meeting, the regulator will leave the door open for curtailing QE, but will refrain from direct instructions on this topic. It may have to wait for the August Fed symposium in Jackson Hole or the September FOMC meeting.
It is assumed that the dovish notes in the statement of the Fed and the cautious comments of Powell will give confidence to the bulls for EUR/USD, which will allow them to aim at 1.1865 and further – at 1.1895 and 1.1975.
If the Fed leaders receive signals indicating their increasing tendency to curtail stimulus measures, this will become a bearish signal for EUR/USD. In the event of a breakdown of 1.1750, the pair will open the road to 1.1704 (the low of March), and then to 1.1602 (the low of November).
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