Last week, the greenback moved in tandem with US reports.
The positive momentum from the recovery of the US labor market pushed the USD to a four-month peak, but then it was forced to retreat due to a decrease in inflationary pressure in the country.
The dollar sank even lower after a drop in consumer confidence in the US tempered expectations of an early tightening of monetary policy by the Federal Reserve.
At the same time, the EUR/USD pair found a local low at the level of 1.1710, stopping a few steps from the March lows in the area of 1.1704, after which it rebounded.
The data released at the end of the last five days showed that in August, the consumer sentiment index in the United States fell to the lowest level since December 2011 – to 70.2 points from July 81.2 points.
The US markets took this news in different ways.
US stock indexes closed higher on Friday. Moreover, the Dow Jones and the S&P 500 have already updated their record highs for the umpteenth time. However, this is nothing more than a developed reflex, since previously any economic downturn was regarded as a reason for increasing incentives.
At the same time, the demand for long-term bonds has increased in the US debt market, reflecting doubts about the stability and speed of economic recovery in the country. As a result, the yield of 10-year treasuries fell from 1.36 to 1.29%, pulling the greenback with it.
Last Friday, the US currency showed a record decline in almost seven weeks and fell by about 0.6% against its main competitors, including the euro.
Against the background of the weakening of the dollar, the EUR/USD pair reached a weekly peak and ended the last five days near 1.1795.
Last Friday, traders preferred the euro paired with a more reliable greenback due to an increase in demand for risky assets.
However, on Monday, market sentiment worsened due to gloomy news from China, which reported weaker-than-expected growth in industrial production and retail sales in the country in July.
This news spurred fears that the world's second-largest economy is suffering from a new wave of COVID-19, and pushed the safe dollar up, while the main currency pair moved to decline. This allows us to regard the EUR/USD growth from last Friday as a simple correction, and not the beginning of an upward trend.
ING analysts believe that the euro will remain under pressure against the dollar, and this week the EUR/USD pair will trade in the lower half of its recent range of 1.1700–1.1800.
"Not only will the broad strength of the dollar put pressure on EUR/USD in the short term, but the euro itself does not have positive catalysts. The soft political position of the ECB generates a sharp divergence with the Fed's course," they said.
The recent signal from the European Central Bank to keep interest rates at a low level encourages investors using borrowed funds to bet on a decline in the euro-dollar exchange rate, ING notes.
Meanwhile, bullish bets on USD have returned to levels last seen at the peak of market concerns about the coronavirus last year, as traders prepare for the Fed symposium in Jackson Hole.
According to the latest data from the CFTC, net long positions in the US currency rose to the highest since March 2020.
This year, the greenback has risen in price by about 3%. Some strategists predict its further strengthening as the Fed moves to tighten monetary policy.
Commonwealth Bank of Australia strategists believe that the market reaction to the July report on consumer confidence in the US was excessive. They are still waiting for the Fed to make an announcement on the reduction of stimulus next month.
"The data for one month is not a trend, but it is worth following them. The dollar may rise this week if the minutes from the July FOMC meeting suggest that the Committee members are considering the possibility of reducing asset purchases as early as next month," they said.
Last month, the Fed said that the recovery of the national economy will continue, despite the spread of the delta variant of the coronavirus in the country. The US employment data released after that, which turned out to be better than forecasts, prompted some representatives of the Fed to suggest that the reduction in asset purchases by the central bank may begin sooner rather than later.
This year, the US central bank has three meetings left on monetary policy - in September, November and December. At each of them, an announcement can be made about the curtailment of the asset purchase program, Rabobank says.
"This month, thin markets may cause jumps in the USD exchange rate in response to the latest news. Given such volatility and pullbacks in the market, we still expect to see the EUR/USD pair at the level of 1.1800 on a one-month horizon," the bank's analysts noted.
"Since a number of the Fed's monetary policy steps have already been included in the quotes, we also keep our three-month forecast for the pair unchanged, leaving it at the level of 1.1700. And finally, due to the transition of the Fed's policy to a new phase, we have revised down the six-month forecast for EUR/USD – from 1.1700 to 1.1600," they added.
At the beginning of this week, the main currency pair lost some of the positions won on Friday.
There are no important releases on the eurozone and the US in Monday's economic calendar. Therefore, the EUR/USD pair is trading under the influence of the demand for risk and the dynamics of the dollar.
Data on the currency bloc's GDP for the second quarter will be released on Tuesday, as well as July reports on retail sales and industrial production in the United States.
On Wednesday, we have the report on eurozone inflation for the month of July, and the minutes from the last FOMC meeting will also be published.
Traders hope to get information from the document about the discussion by the Fed members of the prospects for tightening monetary policy.
MUFG Bank specialists consider the publication of the minutes from the July FOMC meeting to be the main event risk of this week.
"Over the past year, there has been a clear trend towards strengthening the dollar immediately after the publication of the minutes of the Open Market Committee, although very modest. However, there is a risk of a more significant USD rally, as the July minutes may signal that the Fed is approaching a reduction in asset purchases," they said.
On Monday, the US currency was able to attract buyers and recover somewhat from weekly lows around 92.50 points.
If the growth continues, the greenback can go beyond the 93.00 mark in the short term, however, it may meet strong resistance at 93.15–93.20 (the area where the four-month peaks pass).
As for the main currency pair, it still stays below the 100 and 200 moving averages. This suggests that the bears are in no hurry to give up their positions.
The initial target of the bulls is 1.1805. Further resistance is located at 1.1825, 1.1860 and 1.1910.
Support is found at 1.1770, 1.1720 and 1.1700. A breakthrough of the last mark would trigger a drop to 1.1640 and then to 1.1600.
