The US currency remains truly royal calm ahead of the release of data on retail sales in the US and the minutes of the Federal Reserve's July meeting, scheduled for Wednesday, August 17th. The euro is trying to imitate its overseas rival, but it is hardly holding the positions it has won.
To date, the US currency has recovered after a dip to a six-week low reached last week. The reason is the improvement in investor sentiment, which is counting on a further aggressive interest rate hike by the Fed amid persistently high inflation in America. Market participants will analyze the minutes of the July Fed meeting on Wednesday, August 17, looking for new signals of a possible increase in the key rate at the September meeting of the central bank. Currently, the markets estimate the probability of an increase in federal funds rates by 50 bps at 60%, and at 75 bps – at 40%. A report on retail sales in the United States will also be released today, which will demonstrate the current state of consumers. According to preliminary estimates, retail sales increased by 0.1% in July compared to the previous month.
Analysts and market participants are concerned about the current financial conditions, which have returned to April indicators. Recall that at that time the Fed was only planning to raise interest rates, which now totals 200 bps. According to ING currency strategists, now the US central bank has "almost returned to the starting point." The softening of financial conditions and the improvement of the situation on the credit and stock markets have formed investors' assumptions about a more aggressive Fed rate hike. This measure is necessary to combat the growing price pressure, experts believe. The deterioration of financial conditions, on the contrary, hinders the Fed's fight against galloping inflation.
The instability of the current situation contributed to the greenback's growth, but did not prevent the short-term return of the euro to a positive field after the recent fall, which was catalyzed by data indicating a deterioration in investor sentiment. The reason for such pessimism is the fears of German entrepreneurs about the rise in the cost of living of the population, which threatens the stability of the level of consumption among the population. According to analysts, these factors, along with energy problems in the eurozone, increase investors' fears about a further decline in the euro.
Gas Suffering EUR
Currently, Europe is experiencing an energy crisis that has emerged after the introduction of tough anti-Russian sanctions. Earlier, the management of the Russian gas concern Gazprom noted that this winter gas prices in Europe could soar by 60%, up to $4,000 per 1,000 cubic meters. Against this background, the energy crisis in the eurozone countries gained momentum, and the cost of natural gas for the first time exceeded $2,300 per 1,000 cubic meters, and this is not the limit. According to analysts, energy problems hit the dynamics of the euro hard.
The euro has moved away from recent highs against the dollar and the pound in the face of the energy market. The strengthening of the current negative trends puts pressure on the business of the region and jeopardizes the likelihood of the rise of the single currency. This will destabilize the EUR/USD pair, which was trading near 1.0185 on Wednesday, August 17. In case of further deterioration of the situation with gas and electricity in the EU, the European currency will be seriously affected, Saxo Bank believes.
According to experts, uneven economic growth contributes to the deterioration of the current account of the EU countries. Recall that the current account is the bank balance of the eurozone with the rest of the countries. This year, it has become scarce amid increased import prices and a large-scale drop in exports. The deterioration of the current account and the trade situation of the eurozone significantly reduces its economic prospects. "There is a major export engine in the eurozone – Germany, and now it has been seriously affected. The German growth model of recent decades has proved shaky. Against this background, the euro in the EUR/USD pair will fall below parity," IIF economists say.
Three Sources of Tranquility USD
The current economic unrest almost does not affect the US currency. The greenback remains regally calm, waiting for the release of macro data from the US. According to economists, there are three factors that will help the dollar remain strong in the near term.
1) The security of the American economy from the supply shock in the raw materials market. Note that the current energy shock is associated with a fantastic rise in natural gas prices. At the moment, the cost of natural gas is steadily increasing, as importers compete for cargo on the eve of winter amid uncertainty about LNG supplies. However, the American economy remains afloat due to less dependence on external energy supplies. This contributes to the growth of demand for greenback and its protection from negative impacts. Market participants expect decisive actions from governments that will help soften the blow to the global economy.
2) The current actions of the Chinese central bank also support the US currency. This week, the People's Bank of China (PBOC) fixed the exchange rate of the USD/CNY pair in accordance with estimates providing for the further effective functioning of the national economy. According to experts, the Chinese economy needs a weak yuan to stimulate movement. As a result, the medium-term lending rate was reduced by 10 bps, which was a signal to buy the USD/CNY pair. At the same time, the Chinese currency added 1%, approaching the level of 6.80. The current situation with monetary incentives in China is an important factor in supporting USD.
3) Positive data on the American economy serve to strengthen the national currency. Markets are expecting strong reports on industrial production and retail sales in the United States. The reasons for the positive attitude towards macro data are a sharp decline in gasoline prices and an increase in demand for raw materials. High expectations were also recorded regarding the July minutes of the Fed meeting. The current rate of the central bank provides for a further increase in the rate, despite favorable signals in inflation. However, experts do not rule out a hawkish surprise from the Fed. According to analysts, the Fed may tighten financial conditions, which implies a strengthening of the dollar. According to experts, both reports are able to surprise the markets.
Currency strategists take into account the probability of negative developments in Europe this winter and put rising prices in quotes. However, this process is rather slow, analysts emphasize. Against this background, the greenback is steadily getting more expensive, despite the deterioration in the prospects for economic growth in the United States. At the same time, the American economy is still stronger than the European and most Asian economies, experts summarize.
