The European and American currencies are struggling this week – from time to time, the scales tilted in the direction of the dollar, then favored the euro. The battle remains at the level of a draw. In the future, the euro is expected to grow further, while the dollar is expected to gradually weaken.
On Wednesday, the euro was ready to take the lead, taking advantage of the dollar's weakness once again. However, the dollar managed to recover in view of positive macroeconomic data, which was published on time. The information from the United States indicates a steady rise in manufacturing activity.
According to the analytical agency, IHS Markit, US manufacturing activity has increased significantly in the last month of the summer. Its pace was the fastest in the current year. Based on the Institute for Supply Management (ISM) report, the purchasing managers' index (PMI) in August for the US manufacturing sector rose from 54.2 points to 56.0 points. This fact has inspired investors to anticipate an early recovery in the US economy, which has been hit hard by the COVID-19.
The current macroeconomic data has become a relief for the market participants and a strong support for the dollar. Thanks to this, the dollar managed to surpass the euro in the price race, rising sharply and holding on to the top almost until the end of the week. An important "feed" for the dollar turned out to be not only the economic, but also the political factor, namely the comments of Steven Mnuchin, the US Treasury Secretary. The official has asked Congress to approve an additional stimulus package. Analysts say that if this initiative is approved, the dollar will get a head start over the euro.
The rise in inflation expectations is also positive for the dollar. There has been a sharp increase in retail trade and consumption of durable goods in the US. According to experts, they are more than 10% higher than the pre-crisis level, which creates upward pressure on prices. This boosts inflation and sets the stage for the Fed to tighten monetary policy in the near future. In such a situation, experts do not rule out revising the current strategy of the Fed, which is loyal to the excess of the target inflation rate of 2%. In case of negative changes, analysts are sure that the regulator will raise the interest rate.
The short-term dollar recovery has noticeably weakened the euro. The disappointing statistics from the EU countries worsened the situation, worrying market participants. According to the latest data, the core consumer price index of the eurozone in August slowed to 0.4% y/y from the previous 1.2% y/y, being much worse than expected. The key consumer price index, which fell 0.2% y/y in the last month of summer, is also alarming. This was a blow to investors who had expected it to rise by 0.2% y/y. The unemployment rate was not encouraging either: employment in the European labor market rose to 7.9% from the previous 7.7%. Experts say that the indicator has improved by only 0.1%.
The current situation has increased the volatility in the EUR/USD pair. Last Wednesday, the market saw an inspired rally in the euro and an up and down in the dollar, but now, these have subsided. Today, the EUR/USD pair was trading near lows of 1.1848-1.1849, trying to move higher, but these attempts failed.
On the other hand, long-term expectations for the Euro look inspiring, which is contrary to the dollar. Currency strategists at Unicredit expect the European to rise to 1.2200 by the end of this year, and to 1.2800 by the end of 2021. Fed's current policy aimed at targeting the average inflation rate supported this. According to experts, this strategy feeds the trend towards a weakening dollar and strengthening of the euro.
The rally of the Eurocurrency, recorded yesterday, greatly alarmed the ECB. The regulator's management fears that such price fluctuations will negatively affect the economic recovery in the region. The ECB believes that the economy will be thrown back to its previous low positions, which it was at during the pandemic. At the same time, the rise in the value of the euro may negatively affect the volume of European exports, weakening inflation. If this scenario is implemented, the ECB emphasizes that increasing monetary stimulus is necessary.
According to analysts, the rally in the EUR/USD pair may be repeated in the near future. It is difficult to say who will be the winner and who will be the loser in this race, but the process promises to be exciting. Experts conclude that such trends may increase in the run-up to the presidential election battles in the United States.
