The euro-dollar pair is once again testing the 4th figure, reflecting the strengthening of the American currency. The U.S. Dollar Index has approached the boundaries of the 107th figure, the highest value since November 2022. All major currency pairs of the 'major group' have adjusted their configurations accordingly.
Hawkish comments from Federal Reserve representatives and the rise in the ISM Manufacturing Index have had their effect: the greenback is again in high demand. Political battles in Congress and the sharp decline in the Hang Seng Index only added fuel to the fire, intensifying risk-off sentiments in the markets. In general, a favorable environment has now emerged for further strengthening of the American currency. The hawks of the Federal Reserve were able to restore confidence in the greenback after the 'Friday blow.'
Recall that last Friday, we learned about the dynamics of the core PCE index, which reached 3.9%. For the first time in many months (specifically since the fall of 2021), the most important inflation indicator for the Federal Reserve has dropped below the four percent mark. And although the reading came in line with expectations, the dollar reacted quite sensitively to the August result.
The probability of a rate hike at the November meeting has dropped to almost 20% (according to CME FedWatch Tool data). EUR/USD buyers took advantage of the situation, staging a 'corrective counteroffensive.' But after reaching the resistance level at 1.0610 (the Tenkan-sen line on the D1 timeframe), the upward momentum faded. Buyers booked profits, after which the initiative on the pair returned to sellers.
Yesterday's fundamental events only reinforced the bearish positions of EUR/USD. Two Federal Reserve representatives immediately spoke about the need to raise interest rates again by the end of this year, in November or December. For example, Federal Reserve Bank of Cleveland President Loretta Mester noted that the Fed is likely to have to raise rates again this year because inflation risks are currently skewed to the upside. She also reiterated the main thesis of the September Fed meeting—that the regulator will have to keep rates at a high level 'for a sufficiently long time' to achieve a 2% inflation target.
A similar position was voiced by Federal Reserve Governor Michelle Bowman, saying further rate hikes and maintaining them at the current level for a long time 'would be appropriate.' Bowman emphasized that she is ready to support the decision to raise rates at the November meeting 'if the data published by that time show that progress in reducing inflation has stalled or is progressing too slowly.' It is worth noting that Bowman has a permanent voting right in the Committee, according to her position.
Amid such hawkish statements, the 10-year Treasury yields hit a multi-year record, rising to 4.70% (the highest level since 2007). The increase in Treasury bond yields boosted demand for the greenback, which, in turn, reached multi-month highs.
Additional support for the dollar came from the ISM Manufacturing Index. And although business activity in the U.S. manufacturing sector continued to remain in contraction territory in September (the reading fell below the 50-point mark), the index showed an upward trend—despite an expected decline to 47.2 points, it rose to 49 points (with the employment index increasing to 51.2 and the new orders index rising to 49.2).
Other fundamental factors are also providing background support for the American currency. Firstly, the threat of a shutdown persists. In the final hours before October 1st, the U.S. Congress passed a temporary government funding bill (until November 17th). This move unlocked access to $16 billion for government authorities, avoiding a funding shutdown. However, the main political battle will unfold during the vote on the annual budget. The temporary one-and-a-half-month respite will be accompanied by a constant threat of a shutdown.
Risk-off sentiments in the markets are also growing for another reason: "almost everything is falling" on the Hong Kong Stock Exchange. The real estate, energy, and finance sectors are at the forefront of events. The Hang Seng Index fell by 3.4%, and the MSCI Asia Pacific dropped by almost 10% from its July peak. These are the consequences of the hawkish statements by Federal Reserve representatives mentioned earlier. Futures on European and American stocks also declined, while China is on a week-long holiday in celebration of the 74th anniversary of the founding of the People's Republic of China.
Thus, all of the aforementioned fundamental factors allow the dollar to assert itself—including against the euro, which is forced to follow the quoted currency. At the moment, the EUR/USD pair is testing the support level of 1.0480, which corresponds to the lower Bollinger Bands line on the D1 timeframe. The price is located below all the lines of the Ichimoku indicator, which has formed a bearish "Parade of Lines" signal. If the bears break through the price barrier of 1.0480, they will open the way to the next support level at 1.0420 (the lower Bollinger Bands line on H4).
