Euro can surge, if, of course, the dollar does not lure the bulls in EUR/USD into a trap

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US stock indexes do not stop rewriting record highs, while the greenback remains under pressure.

Following the results of yesterday's trading, the Nasdaq updated the record for the 33rd time since the beginning of this year, and the S&P 500 fell just a little short of the record peak.

At the same time, the USD index reached the lowest levels for the first time since August 6.

The stock market continues to enjoy excess liquidity and continues to welcome weaker US data, as the chances of an early tightening of monetary policy by the Federal Reserve are falling, which in turn does not add optimism to the US currency.

At the same time, experts warn that after the summer lull in the autumn, the market is likely to have stronger volatility. They point to such catalysts as the reduction of the Fed's stimulus programs.

"September can be an extremely difficult month for risky assets. Almost all sectors of the market have reached significant levels, the estimates are quite high," the analysts of Newton Investment Management noted.

In addition, the US fiscal year ends in September and the Fed will hold a meeting, where a reduction in QE may be announced.

After the summer calm, everyday life promises to become tense in the foreign exchange market, where until recently the Deutsche Bank volatility index was close to historical lows, and the fluctuations of the EUR/USD pair were mainly limited to the two-cent range.

Traders need to be on their guard, as discussions are intensifying about the feasibility of further monetary stimulus within the Fed and the European Central Bank, whose officials are setting out their arguments in favor of maintaining or curtailing the current monetary policy.

Meanwhile, the statistical data coming out on both sides of the Atlantic should help investors choose one side before the September meetings of the Fed and the ECB give clearer signals about where they are moving.

The US currency has lost almost 1.4% in weight since it reached a nine-month high on August 20 about two weeks ago, and the EUR/USD pair has grown by almost 200 points over the past two weeks.

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The day before, the single currency continued to receive support from the high inflation rates in the eurozone, published a day earlier and gave the ECB's hawks a reason to call for putting an end to the instruments of fighting the crisis as soon as possible.

Thus, a member of the ECB's Governing Council, Klaas Knot, expects that the central bank will begin to reduce the pace of its emergency bond purchases at a meeting to be held next week with the aim of ending them in March.

Robert Holzmann, the head of the Austrian National Bank, spoke in a similar vein, saying that the recovery of the eurozone economy allows the ECB Governing Council to consider slowing down bond purchases under the emergency program as early as next week.

According to Holzmann, when the central bank begins to gradually curtail monetary stimulus, it will be able to focus on tools that will help to sustainably achieve the 2% inflation target.

"If we look at the rest of this year and the upcoming curtailment of the PEPP program in March, the ECB has actually provided for a reduction in asset purchases, announcing many times this year that it is transferring the main volume of purchases to the beginning of the year. In the last couple of weeks, the market has become bolder to the point that it has increased the probability of raising ECB rates until 2025," Saxo Bank specialists noted.

"Now the eurozone can also gain an advantage from the coronavirus point of view, reaching the peak of economic growth, whereas in the United States it is most likely already passed – both due to slower vaccination and loss of consumer confidence, and due to the risk of a "fiscal cliff". In general, as long as risk sentiment is stable, the EUR/USD rally may continue, and the initial goal is to recover to the area of 1.1900 and above," they added.

The hawkish comments of the ECB representatives pushed the yield of 10-year German government bonds to the highest level since mid-July, which became a tailwind for the single currency.

At the same time, uncertainty about the likely timing of the Fed's tightening policy and fading hopes for an early curtailment of QE by the central bank continued to put pressure on the dollar.

The day before, the USD index updated multi-week lows around 92.38 points against the background of a drop in the yield of 10-year treasuries after the release of US data, which made market participants fear for the fate of Friday's payrolls and provided an additional positive impulse for the EUR/USD pair.

A report from ADP showed that the US private sector created only 374,000 jobs in August against the expected 640,000.

The employment component, the ISM manufacturing index, went below the waterline, reaching 49 points, which reflects a reduction.

At the same time, the index itself showed an increase from 59.5 to 59.9 points, which allowed the greenback to slightly reduce losses and forced the EUR/USD pair to retreat from the highest levels reached earlier in the area of 1.1856 since the beginning of August. Nevertheless, on Wednesday, it closed in positive territory for the fourth consecutive day, ending yesterday's trading near 1.1839.

On Thursday, no economic data on the eurozone was published that could affect the market, this left the EUR/USD pair at the mercy of risk appetite and the dynamics of the dollar, which continued to slide down, even though the number of initial applications of Americans for unemployment benefits in the week ended August 28 fell by 14,000, to 340,000.

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Market participants ignored these data, as the main focus is still on the release on Friday of the monthly report on the US labor market.

If the growth of US employment has really slowed down, as indicated by the release from ADP, the dollar is waiting for a quick and aggressive sell-off, since weak statistics may force the Fed to postpone the start of the QE curtailment procedure.

The EUR/USD pair can take advantage of the dollar's fall and reach the level of 1.2000 in the coming weeks, according to Societe Generale strategists.

"A clear upward trend of the dollar is possible only when the Federal Reserve sets a date for raising rates, and this is more likely to happen in 2022 than in 2021. At the same time, it will not be surprising if the EUR/USD pair re-tests the 1.2000 mark in the next few weeks," they said.

ING has a similar opinion.

"The EUR/USD pair may end the year at the upper limit of the range of 1.1700-1.2000 against the background of dollar weakness. We expect a stronger USD rally in the first half of 2022, as players increasingly believe in tightening the Fed's policy during the year," the bank's specialists said.

Meanwhile, Credit Suisse analysts still maintain their forecast for EUR/USD at the end of the year at the level of 1.1600.

"If the economic data for the euro area does not show the expected favorable surprises in the coming months, it is difficult to be inspired by the idea of a constant increase in rates in the euro area and, as a result, a strong trend towards an increase in the EUR/USD exchange rate," they said.

Westpac analysts believe that the decline in the USD index is likely to be limited to the area of 91.50–92.00.

"The heads of the Fed's branches, Bullard, Rosengren and Kaplan, have openly called for the announcement of a reduction in asset purchases in September, but Brainard, Clarida and Powell, most likely, have not yet joined in supporting this idea. Another strong jobs report will restore faith in the recovery of the US economy and revive bets on the FOMC's imminent announcement of a reduction in QE. This should support the dollar," they noted.

Strong US employment data for August are able to launch a wave of long positions on the US dollar, confirming forecasts that already at the September FOMC meeting it will be announced that the start of curtailing asset purchases on the balance sheet will be announced.

If we witness a broader profit-taking on the US stock market in the coming weeks, this could provide even more significant support for the dollar during the period of capital flight towards safe havens.

However, taking into account the current dynamics of the US currency, it can be argued that the market is now preparing for the fact that Friday's NFP will be weak, and the Fed will continue to adhere to the soft rate.

Against this background, the bulls for EUR/USD are still gaining the upper hand.

The next significant resistance is only at 1.1910, and then at 1.1945 and 1.1975.

Support is located at the level of 1.1830, followed by 1.1810 and 1.1780.

The material has been provided by InstaForex Company - www.instaforex.com

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