At the beginning of the month, experts were wondering where the dollar's low and the euro's high are. However, since then, the single currency has fallen in price against the greenback by almost 3%
This was mainly due to a sharp change in the Federal Reserve's forecasts for interest rates, which served as a signal of an earlier tightening of monetary conditions in the United States.
At the same time, European Central Bank representatives were quick to emphasize their more dovish attitude, noting that the United States and the eurozone are in different situations.
"In the foreign exchange market, there seems to be a transition from close monitoring of the ebb and flow of speculative capital into risky assets to greater sensitivity to interest rates, which led to shocks that raised the dollar," HSBC experts said.
"Over the past couple of months, there has been a large-scale build-up of speculative short positions on the dollar, and it seems that they are closing now," they added.
According to the US Commodity Futures Trading Commission (CTFC), the sharpest reduction in USD "shorts" for three months was recorded last week, which was an impetus for the growth of the US currency.
This week, the greenback received support from financial flows typical for the end of the month and quarter, as investors rebalance their portfolios.
Meanwhile, the single currency was under pressure caused by concerns about the widespread spread of the COVID-19 Delta strain in the eurozone, which is why the full recovery of the region's economy may happen later than expected.
The day before, the USD index rose to weekly highs around 91.18 points, while the EUR/USD pair sank to the lowest levels since June 23 in the area of 1.1882.
The dollar was supported by a strong report on consumer sentiment in the United States. According to the Conference Board, in June, the indicator rose to 127.3 points, coming close to the pre-coronavirus level of February 2020 at 132.6 points. The rise in consumer confidence in the country indicates the willingness of citizens to spend money on goods and services, which is an important driver of the growth of the American economy.
At the same time, traders were not impressed by the data on inflation in Germany, where the growth of consumer prices in June was expected to slow down in annual terms to 2.3% from 2.5% recorded in May.
The euro managed to reduce its losses against the dollar thanks to the statement of the Moderna pharmaceutical company that its COVID-19 vaccine is effective against variants of the coronavirus, including the more contagious Delta strain.
Against this background, the EUR/USD pair was able to recover somewhat, but ended yesterday at 1.1900.
On Wednesday, the greenback maintained positive dynamics, continuing to develop growth from 92.00 and updating multi-session highs.
If the bullish momentum increases, resistance in the area of June highs around 92.40 may come into play. This area is also strengthened by the Fibonacci retracement level of the November-January rally at 92.45.
Currently, the protective dollar is strengthening, as investors remain cautious in anticipation of the release of US employment data for June, which will be published on Friday and will show what pressure the Fed is under to move towards tightening monetary policy.
The head of the Federal Reserve Bank of Richmond, Thomas Barkin, said yesterday that the situation in the US labor market will significantly improve by the end of summer. According to him, temporary factors such as people's concern about the COVID-19 pandemic, as well as expectations of an increase in the minimum wage in the country, limit the recovery of the national labor market.
Barkin noted that he would not like the Fed to start reducing the volume of asset repurchases until there is a further improvement in the labor market situation.
Meanwhile, a member of the Fed's board of governors, Christopher Waller, said that the Federal Reserve will probably have to start reducing the asset repurchase program this year in order to be able to start raising the key rate by the end of next year.
"A lot depends on what the US jobs figures will be released this week, in terms of the prospects for the dollar as a whole. If the data does not meet expectations, risky assets will breathe a sigh of relief, and the dollar will be under pressure, " HSBC strategists said.
Although the consensus forecast suggests that the US economy created 690,000 jobs in June, the spread in estimates is quite large – from 400,000 to more than 1 million.
"This is extremely difficult to predict, so the risk of surprise is huge. A super-strong report can really increase the reaction and pressure on the Fed, and a very weak one can repel those who buy dollars, " Westpac analysts noted.
The number of jobs in private companies in the United States increased by 692,000 in June, according to the Automatic Data Processing (ADP) report published today. Analysts expected an increase in the indicator by 600,000.
A strong release from ADP signals that the official US employment data on Friday will also be positive.
"Expectations of a strong report on US employment are now growing, which fuels the strengthening of the dollar, which may continue after the release of the employment report, if expectations are confirmed or exceeded," MUFG Bank experts believe.
In June, the USD index rose by more than 2%, which is the highest monthly increase since March 2020, which was largely facilitated by the hawkish shift of the Fed.
On Wednesday, the euro weakened even more against the greenback, as the eurozone inflation report did not have any surprises for the single currency.
In June, annual inflation in the currency bloc, according to a preliminary estimate, slowed to 1.9% from 2% recorded a month earlier. This allows the ECB not to rush to raise interest rates and maintain a stimulating monetary policy.
The single currency is also suffering from the fact that the new Delta strain of COVID-19 is more common in the eurozone than in America. In addition, Europe lags behind the United States in terms of vaccination of the population.
In the United States, about 46% of adults are fully vaccinated. In Germany, the same indicator is 36%, in France-30%.
The delta strain already accounts for more than 50% of reported cases of diseases in Europe's largest economy, in France – 20% compared to 10% a week ago.
Against the background of the dollar strengthening with a wide front, the bears for EUR/USD had the opportunity to test the area of monthly lows around 1.1850 again. Further, the support is located at 1.1800 and 1.1760.
At the same time, the current oversold indicators may cause a rebound in the short term, which can be stopped in the area of 1.1970. Further, the resistance is at 1.2000 and 1.2050.
The forecast for the pair will remain negative as long as it is trading below the 200-day moving average, which is currently passing near 1.1995.
The material has been provided by InstaForex Company - www.instaforex.com