Oil is getting more expensive, Treasury yields are growing, and the US dollar is strengthening all over the market – this is exactly the sequence that was observed on the markets yesterday. The US dollar strengthened its position against the basket of major currencies, especially in the pairs with the pound and yen. The euro also yielded to the attack of dollar bulls, but in this case, intraday volatility was more modest. If the GBP/USD pair collapsed by more than 200 points in a few hours, then the EUR/USD pair was limited to a 50-point decline. The bears were able to settle within the level of 1.16 but failed to update the annual low set at 1.1664. At the end of the US session, oil retreated from multi-year highs, after which traders began to take profits, thereby extinguishing the downward impulse for the pair. But in general, the downward trend is still in force, given the "hawkish" expectations regarding the Fed's further actions and the "dovish" comments of ECB representatives.
Yesterday, the yield of 10-year US government bonds updated a multi-month high, reaching 1.546%. The indicator was last seen in this area in June of this year on the wave of inflationary growth in the States. At the moment, inflation expectations have also increased due to the energy crisis. The cost of a barrel of Brent crude oil yesterday exceeded the $80 mark for the first time since 2018, while the price of gas in Europe set a historical record, exceeding the mark of $ 1,000 per thousand cubic meters for the first time.
Experts rightly assume that the growth in oil prices may provoke another wave of inflationary growth in the United States, reducing the attractiveness of bonds, increasing their yield and strengthening the US currency. Such a scenario looks quite realistic, especially considering the current situation in the commodity market. According to analysts of the conglomerate Goldman Sachs, prices of oil will continue to grow – Brent may reach the $90 mark by the end of the year. The demand for oil, which has sharply declined due to the next wave of the COVID-19 pandemic, has recovered much faster, relative to earlier forecasts, while the supply on the market is still limited. At the same time, many experts fear that OPEC + will not be able to quickly increase production in response to increased demand due to the effects of Hurricane IDA, which hit the southeastern part of the United States, as well as due to the consequences of a pipeline fire in the Gulf of Mexico.
In addition, the Fed's hawkish position contributes to the growth of Treasury yields and consequently, the US dollar. Speaking in Congress yesterday, Fed Chairman Jerome Powell confirmed that the regulator will begin to cut its monthly bond purchases as early as November. As for the tightening of monetary policy parameters, the Central Bank does not intend to rush here, although many experts believe that the Fed may raise interest rates earlier than this is provided for in the median chart and certainly before the European Central Bank, whose representatives have recently voiced quite "dovish" theses.
In general, the ECB neutralizes the importance of inflationary growth in the eurozone, convincing the markets that the regulator will ignore the trends of recent months. In particular, Christine Lagarde stated once again that the growth of inflation indicators is due to the effect of a low base and an increase in energy prices – that is, temporary factors that will not form the basis for a long-term CPI growth. She also stressed that the ECB's main scenario still assumes that inflation will be below the target level in the medium term, while the risks of a large-scale increase in price pressure are "very limited." A similar position was recently voiced by another representative of the ECB, the Governor of Bank of France, Francois Villeroy de Galhau.
In other words, the ECB regularly reminds market participants that it is an adherent of the accommodative policy, since it considers the price increase temporary. There are still rumors on the market that the PEPP program will be replaced by an "enhanced" APP program in the spring of next year, the volume of which can be almost doubled. As for the fate of the interest rate, the regulator has outlined clear guidelines here – the Central Bank will start considering this issue "no earlier than 2024."
Such intentions of the ECB contrast with the intentions of the Fed, whose representatives allow a rate increase as early as next year. It can be recalled here the updated point forecast of the Fed and not to mention the curtailment of QE, which will begin in a month and a half.
In this case, the main driver of the EUR/USD decline is the uncorrelation of the positions of the ECB and the Fed. All other fundamental factors play a supporting role. Further growth of the oil market will allow dollar bulls to increase their pressure in all pairs, including in pairs with the euro. Therefore, it is advisable to use corrective pullbacks for the pair to open short positions. The nearest support level is 1.1640 - this is the lower line of the Bollinger Bands indicator on the D1 timeframe.
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