FX.co ★ EUR/USD stability remains fragile

USD is struggling to maintain balance in the euro/dollar pair. At the moment, the greenback is trading mixed but there is an evident attempt to harmonize its upward trend. Meanwhile, the euro aims to restore stability but with little success.

At the start of the week, the US dollar witnessed a slight decline against the euro, only to regain momentum shortly after. This relative stability comes in anticipation of a crucial speech by Jerome Powell, the Federal Reserve Chairman, scheduled between August 24 and 26.

Against this backdrop, market participants are focused on two main questions regarding a potential interest rate hike and the likelihood of a recession in the US. As was disclosed on August 18, the chances of a recession occurring in the US economy have dropped to 40%. Notably, since September 2022, this probability had been standing at above 50%.

A majority of economists (99 out of 110 polled by Reuters) are confident that the Federal Reserve will leave interest rates unchanged at its September meeting. Furthermore, 80% of the surveyed do not anticipate any further rate hikes for the remaining part of the year. Yet, several economists forecast a singular key rate cut by the end of the second quarter of 2024.

Market players are keenly focused on Powell's upcoming address at the symposium in Jackson Hole, which commences on Thursday, August 24, and continues through Saturday, August 26. Investors are hopeful to get some insights about the regulator's subsequent moves.

Analysts at Bloomberg Economics believe that Powell will maintain a "balanced tone", emphasizing the end of the tightening cycle. At the same time, this should not stop Powell from "advocating the need for high rates for a prolonged period."

Amid the prevailing conditions, the US dollar aspires to gain firmness and consolidate its upward trajectory. On Monday morning, August 21, the EUR/USD pair was hovering around 1.0884, attempting to recover from prior losses. The pair's activity during this period was somewhat mixed.

Last Friday, August 18, EUR/USD plummeted to new lows, retreating to 1.0840. Experts speculate that any further weakening would drive the pair towards the 1.0830 mark. However, despite this bearish outlook, the pair did attempt to make a comeback, shortly passing the 1.0900 level, but lost its bullish momentum.

In recent weeks, the EUR/USD pair has displayed a persistent bearish trend, unable to leave the downward channel. If the currency pair reverts to its July low of 1.0833, the dollar will be exposed to vulnerability. In the short term, EUR/USD is expected to test the 200-day SMA at 1.0790 which represents a "strong support level", according to economists at the UOB Group.

Currently, the greenback benefits from robust macroeconomic data in the US manufacturing sector. Late last week, as per reports from the Federal Reserve Bank of Philadelphia, the August Manufacturing Activity Index saw a sharp rise, jumping by 12 points from the prior value of -13.5. Notably, experts had forecasted this figure to decline to 9.8 points. This bolstered the market's anticipation of a rate hike by the Federal Reserve.

Earlier, the Federal Reserve reported a 1% growth in US industrial production although analysts had pegged this growth at a mere 0.3%. Despite these figures, inflationary risks have intensified, contrary to investors' expectations of the Federal Reserve softening its stance on rates.

Conversely, positive macroeconomic data has heightened expectations of an interest rate hike starting from November 1, 2023. Analysts now gauge the probability of such a move at 41%, up from 31% just a few weeks earlier. This scenario bodes well for the dollar but will likely have an adverse impact on the stock market and a majority of risk assets.

As observed by market specialists, the greenback has showcased growth across seven consecutive sessions. Based on the US Dollar Index (USDX) data from the past week, there was a notable increase in bullish sentiments towards the US currency. Against this backdrop, traders have amplified their net long position on USD which has surged from the lowest levels seen over the past two years. As for the major market players, they have increased their dollar purchases by 14%. The continuation of the current trend contributes to the growth of the US currency, experts conclude.