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Although the market hints to the dollar that the Fed is not the only hawk in the city, the bears for the USD are still at


According to the results of the second quarter, the euro rose in price against the US dollar by more than 1%. At the same time, the peak of the EUR/USD pair growth occurred in May.

The single currency was supported by the fact that long-term profitability in the United States stopped growing, while in the European Union it even turned out to be higher, despite the heavy hand of the ECB, which, in fact, contributed to the rise of the euro, analysts at Saxo Bank note.

However, after reaching the highest levels since the beginning of the year, the EUR/USD pair sank by more than 400 points.

The pace of its decline accelerated after the Fed released a hawkish forecast of an interest rate hike in 2023.

"Analysts are now wondering whether the greenback will be able to go up confidently again and remain steadily strong after a relatively weak second quarter," Saxo Bank said.

"In the current quarter, the United States will probably not accept new incentive payments or other significant incentive costs. At the same time, the amount of infrastructure spending decreases with each new round of bipartisan negotiations in Washington," the bank's specialists said.

"However, as the third quarter comes to an end, and the pace of the US economic recovery slows down, expectations for new incentives will grow. By the fourth quarter, the Fed's talk of reducing QE may be replaced by an admission that the Central Bank will have to increase asset purchases to finance the expenses of the national government. The realization that constant stimulus will lead to an even greater reduction in real rates in the US, possibly as early as the fourth quarter, will be the impetus for the next significant weakening of the dollar. And until then, the USD bears risk being left with nothing if everything goes as expected," they added.

"As for Europe, in the third quarter it will closely monitor the results of the parliamentary elections in Germany, which will be held on September 26 and will mark the end of the era of Angela Merkel. After that, the eurozone will either start a slow movement towards a new crisis, or Germany will still bet on the EU, which implies increased attention to integration policy and large-scale fiscal incentives. The second option is especially likely if the Greens get a majority of votes, and their leader, Annalena Berbock, becomes the next chancellor of Germany," Saxo Bank believes.

"The firm commitment of all its members to the alliance, the solution of inherited banking problems, the harmonization of reforms and large budget expenditures, together with a steep yield curve and more positive long – term returns across Europe, can cause an amazing recovery of the euro after this election, if, of course, this path is chosen," the bank's analysts predict.

So far, it is July and investors continue to monitor the debate that is going on on both sides of the Atlantic as to whether the recent price hikes will turn into a longer-term trend and whether it is worth curtailing monetary stimulus ahead of schedule.


This week, the ECB plans to hold a special meeting to discuss the QE program and the change in the price stability strategy.

The "hawks" in the ECB's Governing Council are calling for an early curtailment of the €1.85 trillion emergency asset purchase program (PEPP), which is scheduled to end in March. Their opponents, in turn, insist on further stimulating the region's economy.

ECB representative Isabel Schnabel said yesterday that exceeding the regulator's inflation target as the economy recovers is absolutely normal. She believes that maintaining monetary and fiscal incentives is necessary to ensure the growth of inflation.

Meanwhile, her colleague Klaas Knot warned about inflationary risks and pointed out that the economic stimulus should stop in March next year.

Meanwhile, the discussion of price pressure in the US has taken a more concrete form. The main attention is now focused on the national housing market. Experts do not demand that the Federal Reserve immediately curtail incentives, but they want the regulator to at least stop inflating the "bubble" of the real estate market.

Even some representatives of the Federal Reserve expressed concern about the current situation.

"The United States cannot afford another cycle of inflation and decline in the real estate sector," said Eric Rosengren, president of the Federal Reserve Bank of Boston, last Monday.

"I don't think a crash is inevitable, but I think the Fed should pay close attention to what is happening with the housing market," he said.

The head of the Federal Reserve Bank of Dallas, Robert Kaplan, also calls for a reduction in the volume of securities repurchased by the Fed and, in particular, mortgage bonds.

"We are seeing unforeseen consequences and side effects of these purchases," he said.

The president of the Federal Reserve Bank of St. Louis, James Bullard, last month proposed to reduce purchases of mortgage bonds.

"I am gradually inclined to think that perhaps we do not need to purchase mortgage – backed securities in the conditions of a boom in the housing market, which threatens to form a "bubble"," he said.

At the same time, supporters of maintaining QE in current volumes, including Lael Brainard, argue that the purchase of mortgage bonds in general supports the system and in the long term is not much different from the purchase of government bonds.


On Wednesday, the minutes from the June FOMC meeting will be published, in which investors will look for signs that Federal Reserve officials have changed their attitude to inflation and monetary stimulus. At least, this is hinted at by the adjusted dot chart of the regulator, according to which the increase in interest rates in the United States may begin earlier than expected.

On Monday, the EUR/USD pair failed to develop intraday growth, ending the day in a flat and almost returning to the levels from which it started.

Positive statistics on the eurozone did not provide significant support for the pair. In June, the composite purchasing managers' index of the currency bloc rose stronger than expected, to 59.5 points from 57.1 points recorded in May, against the forecast of 59.2 points. The value of the indicator has become a record since June 2006.

On Tuesday, the single currency tried to grow in company with the British pound and the Australian dollar, but quickly turned around.

The pound jumped to a one-week high around $1.3898 due to increased expectations that the UK will become the first major country to officially start living in two weeks, lifting restrictions related to COVID-19.

At some point, the Aussie rose to $0.7599, as the Reserve Bank of Australia said it would reduce bond purchases, was optimistic about the economy and expects an upward revision of its forecasts.

"It is obvious that the Fed is not the only hawk in the city. The central bank of Australia gave a positive assessment of the national economy. This suggests that it is in a much better position than expected, " Maybank experts noted.

Against this background, the EUR/USD pair rose almost 90 points above the lows of last Friday (in the area of 1.1808), but then fell back.

Europe has less and less reason for optimism. The new COVID-19 "Delta" strain continues to attack Spain and Portugal, and its high contagion is a threat to neighboring countries as well.

Meanwhile, Germany reported a drop in production orders in the country in May by 3.7% on a monthly basis, although an increase of 1% was expected.

The index of investor confidence in the German economy in July fell to 63.3 points from 79.8 points recorded in June. Analysts predicted a decline in the indicator to 75.2 points.

As for the technical picture, above the daily maximum of 1.1895, the resistance is located at 1.1910 and further-at 1.1950 and 1.1975. The breakdown of the last level will aim the "bulls" at the psychologically important mark of 1.2000.

The nearest strong support for EUR/USD is around 1.1800. Below, in the area of 1.1775, there is a multi-month trend line. The breakdown of this support will clear the way for the bears to further decline.

The material has been provided by InstaForex Company -