Euro, forward! The dollar has slowed down! The EUR/USD pair is awkwardly putting pressure on the gas

The euro is trying to gain from the gas problems that eurozone countries are facing. The EUR has been losing most of the time, but now there is little chance of a short-term recovery with the USD rally slowing down.

The dollar took a breather on the morning of Tuesday, September 6 to recover from a “heady” rally. This strategy has led to some decline from all-time highs against the euro, but it is too early to draw conclusions. The threat of recession hangs over both currencies. Adding fuel to the fire is the high probability of a sharp rise in interest rates in the US.

The short-term slowdown in the growth of the USD against key currencies and a slight decline against the Euro was caused by the expectation of statistical data on the index of business activity in the US services sector (ISM). According to preliminary estimates, this number decreased to 55.1% in August from 56.7% in July. Significant support for the US currency is provided by expectations of a rate hike by the Federal Reserve System. At the same time, 62% of specialists include in their prices an increase of another 0.75 percentage point, up to 3-3.25% per year.

In such a situation, the dynamics of the euro, which has to withstand the gas crisis in the eurozone, is in trouble. Earlier this week, the euro fell 0.7% to 0.9880. According to experts, this is the lowest value in the last 20 years. The current energy crisis has seriously shaken the position of the euro. The driving force behind this fall was the actions of the Russian authorities, which announced a complete stoppage of natural gas supplies via the Nord Stream gas pipeline. According to analysts, this will increase the economic problems of European businesses and households.

Against this backdrop, massive short positions in European and UK currencies were noted. Experts fear that this trend will intensify. According to currency strategists at ING Bank, “gas pressure has sent the EUR/USD pair to new lows this year”. Recall that earlier this week the pair fell below 0.9900 for the first time since October 2002.

According to ING economists, the EUR/USD pair will continue to decline to a new support level in the 0.9600-0.9650 range in the near future. However, this is an extremely low level for the pair, which threatens the existence of the single currency. EUR/USD traded near 0.9963 on the morning of Tuesday, September 6, retrieving previous losses. However, experts are warning against euphoria as the dollar is poised to rebound, continue its rally and push out the euro.

In such a situation, many analysts see a way out in a further increase in the key rate by the European Central Bank. However, ING economists do not agree with this, as they consider it excessive to increase the rate by the central bank by 75 points at once. According to experts, this will not solve the current problems of the eurozone. ING Bank believes that a 75 basis point rate hike at the next meeting, scheduled for Thursday, September 8, is “too big a step for the ECB, which will not help the euro”. You should expect it to increase by 50 points, analysts conclude.

Expectations of a sharp rate hike by the ECB (by 75 points) are being boosted by rising inflation in the Eurozone, the threat of recession and disappointing macroeconomic data for the region. The icing on the cake was the deepening energy crisis in Europe. This undermines demand for the single currency, experts point out. According to current reports, retail sales in the eurozone fell by 0.9% year-on-year in July. At the same time, the markets expected a decrease of 0.7%. In addition, the Sentix Investor Confidence Index fell to -31.8 points in September from -25.2 points in August. In this context, Sentix analysts noted a “clear deterioration” of the economic situation in the eurozone and emphasized that this is the lowest rate since May 2020.

The US currency continues to benefit from the current situation, despite the short-term decline. Many experts agree on the long-term upward trend of the dollar, which is observed from mid-2021. Experts believe that a significant divergence in the monetary strategies of central banks is a significant driver of the growth of the USD against the euro. It should be noted that the ECB is still “two steps behind the Fed” when it comes to raising rates. Even its July increase of 50 points did not save the situation. However, the ECB may revise its strategy and raise the rate by 50-75 points at the next meeting.


Another important factor in the growth of the dollar is the stability of the American economy. According to analysts, it is relatively easy in the US to survive the gas crisis while still selling energy to Europe. In the long run, this situation works against the ECB and the countries of the European bloc, but plays into the hands of the Federal Reserve System. In such a situation, it is difficult for the ECB, unlike the Fed, not only to raise, but also to keep rates at a high level. Under such a scenario, a deep economic downturn may occur in the eurozone, experts warn.

The current market environment creates a bullish outlook for the dollar index (USDX). Currently, bulls on the dollar are in a strong position, pushing the bears. However, the situation can change at any time. In the short and medium term, analysts allow it to rise to an impressive 120 points, i.e. an increase of 9%. In a favorable scenario, the USDX will head towards the highs of 2001-2002. However, experts consider this option to be extreme, although they allow its implementation until the end of 2022.

Article author: Instaforex team

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