The second week of May turned out to be significant for the EUR/USD pair: for the first time since 2017, traders were able to enter the area of the 3rd figure. The next trading five-day period again turned out to be on the bears' side, who lowered the price by another 200 points. Parity is more and more clearly visible on the horizon, although it is still too early to talk about its achievement. Ahead of the EUR/USD bears are the key support levels that were last tested 20 years ago, back in 2002. Therefore, bears will have a hard time in this price area, especially in the context of overcoming the boundaries of 1.0340 and (especially) 1.0300. Five years ago, the bears ran into this price barrier and reversed almost immediately. After that, the pair was already within the framework of a pronounced upward trend, rising to 1.2000 by December 31, 2017.
It is noteworthy that five years ago, the pair collapsed into the area of the third figure against the background of geopolitical instability and tightening of the Federal Reserve's monetary policy. The Fed gradually but consistently raised the interest rate, and European investors shuddered in anticipation of a repeat of Brexit, only now in French execution. In the spring of 2017, presidential elections were held in France, which, as you know, Emmanuel Macron won. However, a few months before this event, his victory was by no means decided. Marine Le Pen's rating was gaining momentum, and her anti-European rhetoric was gaining popularity. And here it should be noted that Le Pen of the sample of 2017 and 2022 are, in fact, two different politicians. At that time, she promised to withdraw the country from the EU and from the eurozone, whereas this year her election program has noticeably softened – Le Pen proposed only to reform the European Union "from within", without leaving the EU.
As for the Fed's policy, the tightening process in the period 2015-2019 took place smoothly, steadily and in 25-point steps.To date, the EUR/USD pair is declining, at first glance, "by the same leaps and bounds": geopolitical instability + divergence of the positions of the Fed and the European Central Bank. However, the current conditions are more radical and pessimistic for the euro. Therefore, it is now impossible to draw conditional "red lines", assuming that the EUR/USD bears will stop in the area of 2017 support levels, not daring to storm the 2nd figure. No, in the current conditions, bears are quite capable of going further – they only need the appropriate information support for this. And, judging by the results of the past week, the fundamental background is developing just accordingly, contributing to the further decline of the pair.
Firstly, the report on the growth of inflation in the United States did not disappoint. A formal slowdown in growth does not count. The overall consumer price index remained above the 8 percent mark, the core - above 6 percent. These are long-term records that allow the Federal Reserve to further tighten monetary policy at an aggressive pace.
Actually, this factor is the second circumstance pushing the EUR/USD pair down. Last week, some Fed representatives (who have the right to vote this year) actually announced several rounds of a 50-point rate hike. We can speak with confidence about the June and July meetings. The September meeting is questionable, since here the members of the US central bank will evaluate the effectiveness of the measures already taken. If inflation does not slow down, the Fed will also raise the rate by 50 points at the September meeting. Also, a 75-point increase at one of the meetings is not excluded (again, everything depends on the further trajectory of the main inflation indicators) – Fed Chairman Jerome Powell did not categorically deny this scenario, noting only that the Committee members "do not actively discuss it."
Thirdly, the EUR/USD pair is declining due to the passive-expectant position of the ECB. In fairness, it must be admitted that the "hawkish voices" from the ECB have been sounding louder lately, thanks to which the currency strategists of many large banks are revising their earlier forecasts. In particular, according to Goldman Sachs analysts, the ECB may raise interest rates by 25 basis points in July, after it decides at the June meeting to terminate its asset purchase program by the end of the second quarter. Experts also suggest that the ECB may consider a 25-point rate hike at the September meeting and in December. If we talk about longer-term prospects, here Goldman Sachs analysts predict four increases within the next year.
It is noteworthy that the euro (especially paired with the dollar) actually ignores the tightening of rhetoric from the ECB representatives. Rare corrective pullbacks occur only due to profit-taking or due to the weakening of the greenback. While the euro is not able to influence the pair, strengthening its position. This suggests that the single currency is too vulnerable – against the background of the impending energy crisis, the sanctions confrontation with Russia and the protracted (and so far inconclusive) Russian-Ukrainian negotiations. Plus, there are risks of stagflation and recession. All these factors are pulling the euro to the bottom, leveling the optimism associated with the "hatching" tightening of the rhetoric of ECB members.
Thus, there are no grounds for a reversal of the downward trend for the EUR/USD pair. At the same time, corrective pullbacks are quite possible, and moreover, they will be very useful in the context of opening short positions at a more favorable price. But here it is necessary to take into account the fact that further steps towards the 1.0300 mark and (especially) towards the second figure will not be an easy walk for EUR/USD bears. Here, the downward trend may stall for some time, playing out very broad corrective waves. Therefore, it is advisable to go into short positions not at the lowest price point (1.0350 and below), but when the next corrective wave fades, optimally – around 1.0450-1.0500.
