The U.S. currency occasionally tries to rise and secure the upward momentum, but usually those efforts are blocked by the euro's persistence. For several weeks, the euro, taking advantage of the dollar's weakness, has significantly strengthened its position and refuses to give up.
The euro rose sharply at the beginning of the new week, waiting for positive announcements from the major central banks - the European Central Bank and the Federal Reserve, which will be released on Wednesday, February 1. The vast majority of analysts (99%) are confident that the US central bank will raise its benchmark rate by 25 bps to 4.5% to 4.75%. As for the ECB, whose reports will be published on Thursday, February 2, the markets expect to hike the rate by 50 basis points. A similar decision is expected from the Bank of England.
Earlier, the euro received strong support from the ECB showing a hawkish stance and the greenback getting weaker. Subsiding fears over the EU recession also contributed to the positive mood. Last week, the euro rose by 0.03%, reaching 1.0870 and then it surpassed the current result. The euro has sustained growth for four consecutive months. Later, the single currency tried to consolidate its uptrend and was on the way to 1.5% growth for the month, but unfortunately, it failed to hold on to its position. On Monday morning, January 30, the EUR/USD was trading at 1.0858, trying to overcome the pull of the current range.
Against this background, the greenback, which has been falling recently, began to gradually strengthen. The dollar's efforts were not in vain, although they did not necessarily lead to a significant breakthrough. However, on Monday, January 30, the greenback managed to move away from an eight-month low ahead of the central banks' meetings. Markets are focused on the central banks' decisions regarding interest rates.
The current situation negatively affected the dollar index (USDX), which fell by 1.5%. According to analysts, such a decline has been observed over the past four months. The reason is that markets expect that the Fed will finally consider pausing rate hikes. However, the implementation of such a scenario is still in question.
Last week, experts recorded an increase in bullish sentiment for the US currency. Market participants increased their positions for further growth of the USD after a two-week decline. At the same time, traders and investors increased long positions on the dollar by 5% and reduced the number of shorts. According to experts, the strengthening of this trend will help the growth of the US currency.
Many experts feared the collapse of the EUR/USD pair, but the negative forecasts did not come true. Instead, the pair updated the highs every time. This happened at a time when it seemed that the pair was one step away from the abyss.
The catalyst for such price swings was US GDP data for the fourth quarter of 2022. Analysts had expected this figure to rise to 2.6%, but it suddenly surprised the markets, reaching 2.9%. Note that in the first minutes after the release of the data, the pair, which was trading at 1.0893, initially collapsed to 1.0872, and then rose to 1.0916. Experts recorded a rather high volatility in the pair, although it remained low for several weeks. In the short and medium term, some analysts allow the collapse of the EUR/USD pair. Such a development of events is possible if the Fed refuses to further cut the rate in the second half of 2023.
However, with the current tightening of monetary policy by a number of central banks, those currencies that receive support from their central banks are becoming more expensive. First of all, this concerns the euro, which has successfully outperformed the dollar for a long time. The reason is the ECB's current strategy, thanks to which the central bank is able to raise the rate at a faster rate than the American one. According to analysts, the ECB hawks are in a strong position, but they could also fold at the first sign of inflation weakening. At the same time, experts believe that the 50 bps rate hike issue has been resolved. Therefore, markets should focus on the central banks' next actions.
In regards to the US central bank, the requests of market participants are much more modest. The Fed is expected to raise the key rate by only 25 bps, up to 4.5-4.75%, while from the ECB and the BoE - by at least 50 bps. At the same time, some analysts assume that in March, the ECB will limit itself to raising rates to 25 bps. Experts conclude that the deterioration of the situation with wages and the level of inflation may hinder the implementation of such a scenario.