(Daniel Kostecki – Conotoxia)
The euro this morning is the strongest of the world’s major currencies, gaining nearly 0.5% against the USD. The main currency pair’s exchange rate is still above parity and has reached its highest level in three weeks.
EUR/USD with a chance for a bigger rebound?
The struggle with the parity level of 1.0000 on the EUR/USD pair has been going on for quite some time. The rate seems to oscillate around this level, finding itself once above and once below this “psychological” barrier. Nevertheless, there may now be chances that the euro may be preparing for a bigger rebound. On the one hand, this may be supported by expectations of monetary tightening in the Eurozone and on the other by the Ukrainian military offensive and its effective retaliation.
As the British Defense Ministry reported on Monday, Moscow is believed to have ordered the withdrawal of its military forces from the Kharkiv region, leading Ukraine to regain control of some territories. Near the city of Kherson, the latest intelligence briefing noted that Russia is having difficulty bringing reserves to the front line across the Dnieper River using improvised bridges, while Ukraine continues to shell the area with long-range artillery. Due to recent developments, confidence in the Russian military command will continue to decline, the British report concluded, BBN/ND mentioned.
The gap between the USD and Euro advantage seems narrowing
From the point of view of the interest rate market, the difference in the expected interest rate of the US dollar and the euro in the future also seems to be narrowing – as FRA contract quotes may indicate. In addition, the gap between the 2-year USD and EUR interest rates has narrowed to levels last seen in early March, when the EUR/USD rose toward 1.10, Bloomberg commentators note. So it seems that this may be changing the outlook in the forex market from a one-sided view that everything may depend only on Fed action to a more balanced view in which the ECB may play a more prominent role. Perhaps the impact of this has not yet been fully priced in, and could result in EUR/USD possibly having a chance to make up some of its losses after Russia’s invasion of Ukraine.
EUR/USD has finished forming an accumulation?
From the point of view of the chart, we can go back to the events of late August. At that time, the EUR/USD fell to the area of 0.9900 and consolidated in the region of 1.0000 – 0.9900 for many days. This could have led to the emergence of a potential accumulation in a relatively small range of fluctuations. Instead, it could culminate in a move toward 0.9850, where the euro fell to its lowest level in 20 years, which happened in early September. Then there could have been a so-called spring and a test of supply. The ensuing upward wave, in turn, is a possible “show of strength.” At stake now could be a sustained hold above 1,0000 and the overcoming of the downward trend line, the beginning of which was already set six months ago, in March.
What else is the EUR/USD likely to react to this week?
In addition to events from the war front and statements from central bankers, US inflation data may also be important. According to market consensus, inflation may fall to 8.1% in August from 8.5% in July and 9.1 in June. On the one hand, a deeper drop in inflation could be more positive for risky assets, while an above-consensus reading could continue to support the dollar, and the current weakness could be considered a correction.