The US dollar index continues to demonstrate positive dynamics, trying to settle within the 93rd figure. The growth of the index is gradual and measured, with rather deep pullbacks. While the EUR/USD pair has been steadily plunging for several days in a row, updating more and more price lows. This suggests that the downward dynamics of the pair is due not only to the strengthening of the greenback, but also to the weakening of the single currency. These parallel processes complement each other harmoniously, reinforcing the downward trend. The 16th figure already looms on the horizon, which has been out of reach for the EUR/USD bears for the last ten months. The last time the price crossed the 1.1700 mark from top to bottom was at the end of October 2020. Another attempt to conquer this target was at the end of March this year, but then the bears stopped at 1.1704 and began to take profits en masse, thereby extinguishing the downward momentum.
To date, the bears are enjoying not only the strengthening of the US currency, but also the weakening of the euro. The uncorrelation of the positions of the Federal Reserve and the European Central Bank is becoming more pronounced, and the latest macroeconomic reports only emphasize this uncorrelation. For example, US Non-farms reflect the recovery of the labor market in America – the indicator of the increase in the number of employees has been growing for the fourth consecutive month, and the unemployment rate has fallen to 5.4%. Inflation in the United States is showing record growth at all, and not only due to the effect of the low base of last year. The structure of inflation indicators suggests that the price growth mainly occurred in rather narrow categories. But at the same time, there are numerous signs that the list of these categories will expand – especially in light of the increased consumer activity of Americans. We should also not forget that large-scale fiscal and incentive programs have led to the formation of a "savings bubble".
Analysts point to strong domestic demand against the background of limited supply in some areas and a shortage of a number of goods due to supply disruptions. All this leads to an increase in prices. In other words, Americans are actively spending their accumulated funds, and demand in many cases exceeds supply, which is why the inflationary spiral is spinning stronger and stronger. Tomorrow's inflation release may be another confirmation of the above trends. If the July consumer price index comes out in the green zone again, the greenback will receive significant support throughout the market.
The euro, in turn, is under pressure from today's data from the ZEW Institute. In particular, the index of sentiment in the German business environment in August immediately collapsed to 40 points – this is the weakest result since November last year, when the Germans again found themselves in the trap of another lockdown. Analysts, of course, expected negative dynamics against the background of the spread of the "delta" strain, but, according to their forecasts, the indicator should have decreased by only 8 points (while in fact it collapsed immediately by 23 points). For comparison: this indicator came out at the level of 63 points in July. This is the strongest downward pace in the last ten months.
In Europe as a whole, this indicator showed a similar trend. If in July the pan-European ZEW index was at the level of 61 points, it fell to 42 in August. After the recent surge of optimism, when both in Germany and in the EU as a whole, the indicators showed steady growth, this dynamics looks depressing, and this fact has had a corresponding impact on the single currency. In one of her recent speeches, ECB President Christine Lagarde admitted that many early indicators again warn of a deterioration in the situation in the eurozone, so the risks for forecasts remain downward. According to the World Health Organization, the delta coronavirus strain became dominant in 19 of the 28 countries that provided sufficient sequencing data. This variant of Covid has already been detected in almost all EU states. Reacting to these trends, a number of European countries are gradually "tightening the screws", although it is too early to talk about full-fledged lockdowns. The restrictions (so far) apply to unvaccinated people. For example, Malta has banned the entry of unvaccinated tourists, Germany has introduced strict quarantine rules for visitors from the Netherlands and Spain. Portugal and Greece have opened bars and restaurants exclusively for vaccinated guests. And Italy and France banned unvaccinated people from visiting museums, fitness halls, cinemas and many other crowded places during the weekend.
Thus, the pressure on the EUR/USD pair is exerted not only by the greenback, which is strengthening its positions throughout the market due to the strengthening of hawkish expectations, but also due to the weakening of the euro. Let me remind you that the ECB's new strategy allows for a temporary excess of the target inflation rate, allowing the central bank to ignore such an inflationary surge. This fact further postponed the moment of a possible increase in the interest rate. According to most analysts, the ECB will raise the rate no earlier than 2024 (2025 also appears in the reports of currency strategists). As for the prospects for QE, there were no hawkish hints here too, and there are still none.
All this suggests that short positions in the EUR/USD pair are still a priority. The bears broke the support level of 1.1730 (the lower line of the Bollinger Bands indicator on the daily chart), marking 1.1650 as the next target - this is also the lower line of the Bollinger Bands indicator, only on the weekly chart.
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