EUR/USD: Dollar is trying to figure out whether the Fed will leave the door open for an earlier QE cut or release doves.


Fears for the fate of the global economy, as well as expectations of the imminent start of curtailing monetary stimulus from the Federal Reserve, have been pushing the protective greenback up over the past week.

The minutes published last Wednesday from the July FOMC meeting revealed a wide range of opinions among the Fed's leaders regarding the start date and the pace of a gradual decline in bond purchases, but showed that most of them are ready to start reducing QE this year.

This led to another decrease in risk sentiment in the markets, a pullback of US stock indices from record highs, a fall of the EUR/USD pair by 130 points and an even greater strengthening of the safe dollar.

Over the past week, the greenback has gained almost 1.1% in weight, rising above 93.73 points.

On Friday, the USD reached levels not seen since November 4, 2020, but then it slightly adjusted.

Apparently, market participants decided to lock in profits on the eve of the annual Fed symposium, which will be held on August 26-28.

In addition, the ardor of dollar bulls was cooled by the comments of the President of the Federal Reserve Bank of Dallas, Robert Kaplan, who on Friday said that he could reconsider his call to start curtailing the QE program in October if the epidemiological situation in the United States worsens due to the spread of the COVID-19 "Delta"strain.

Hopes that the US central bank will maintain a stimulating policy for longer if the more contagious version of the coronavirus hinders economic progress allowed key US stock indexes to finish trading on Friday with a confident rise, although they fell by an average of 0.7–1.1% at the end of the week.

Against this background, the EUR/USD pair managed to partially recoup its losses. Starting on Monday from the level of 1.1795, it found a local low in the area of 1.1665 and ended the last five days around 1.1695.

At the beginning of this week, the risk appetite in the markets increased slightly due to positive news from China, where the spread of the COVID-19 delta variant was brought under control. This contributes to the weakening of demand for safe haven currencies, including the dollar.

Rumors that the Fed will not reduce the purchase of assets also put pressure on the US currency.

The USD index traded near 93.00 points on Monday, losing almost 0.5% against its main competitors and reversing some of its recent gains.

The initial support is located at 92.45 (the low of mid-August), followed by 92.40 (the 50-day moving average) and 91.78 (the low of the end of July).

On the other hand, a break above the recent peaks around 93.73 will open the door to the round level of 94.00, and then to 94.30 (the November 2020 high).

The main US stock indicators on Monday continue to recover after the sell-off of last week, rejoicing at the prospects that the Fed will postpone the reduction of the bond purchase scheme. However, the reason why the Fed may refuse to reduce the printing of dollars is far from joyful. We are talking about the rapid spread of the delta variant of COVID-19 in the United States.

The number of new cases of the virus per day in the country is approaching 150,000, which is ten times more than at the beginning of June.


For the dollar to continue to weaken, it is enough for delta to disrupt the plans of the US central bank to reduce QE, but not undermine the recovery of the national economy.

On Thursday, August 26, the second assessment of the dynamics of US GDP in the second quarter will be published, and a week later, on September 3, data on the country's labor market for August will be released.

If there are signs that the US economy is slowing down, the Fed is unlikely to rush to tighten monetary policy.

According to forecasts, in the second quarter, US GDP expanded by 6.7% on an annualized basis. The first estimate reflected an increase of 6.5%. In the first quarter, the indicator rose by 6.3%.

Some investors believe that the Fed will make a mistake if it starts to reduce its support for the economy at a time when its growth is beginning to lose momentum, and the delta strain threatens to curtail the reopening of enterprises across the country.

Goldman Sachs lowered its estimate of economic growth in the United States in the third quarter from 9% to 5.5% due to the impact of the Delta coronavirus strain.

"It seems that the delta variant of COVID-19 had a slightly greater than expected impact on economic growth and inflation in the country due to the impact on consumer spending and production. Expenses for food, travel and some other services are likely to decrease in August, although we expect that this decline will be modest and short-lived," the bank's strategists noted.

At the same time, they raised their forecast for US GDP for the fourth quarter to 6.5% from 5.5%, based on the assumption that fears about viruses will decrease, the recovery of the service sector will resume, and stocks will be replenished.

Currently, evidence of a slowdown in the US economy is evident everywhere: from a decrease in passenger traffic at airports to a drop in restaurant reservations in online services.

It is still unclear how these factors will affect the rhetoric of Fed Chairman Jerome Powell in such a rapidly changing environment. Earlier, he mostly downplayed the negative consequences of the new wave of COVID-19.

On Friday, the head of the US central bank will speak at the annual symposium of the Federal Reserve, which this year will be held online instead of the usual place in Jackson Hole, Wyoming.

From the tone of the speeches of Powell. The short-term dynamics of the USD will depend on Powell.

If the Fed chairman reports that a premature curtailment of asset purchases will hit the national economy, market participants may see this as a signal that the regulator will implement monetary stimulus measures for a longer period than expected. An additional printing of dollars will mean a weakening of the US currency.

If, however, Powell will more clearly indicate the possible timing of the beginning of the curtailment of QE, this will support the greenback.


According to the baseline scenario of the Commonwealth Bank of Australia, the Fed will announce the beginning of the curtailment of monetary stimulus in September, if the data on the number of jobs in the US non-agricultural sector published at the beginning of next month turns out to be strong.

The dollar, as a traditionally reliable asset, has growth potential due to an increase in cases of infection with the Delta strain in a number of countries around the world and increased fears for the global economy, CBA analysts believe.

The reluctance to take risks is designed to support the US currency, say strategists at MUFG Bank.

"While the Fed's cautious stance should reduce the degree of dollar gains, it is necessary to make some adjustments to our forecasts for USD at the end of the year to reflect a smaller drop in the dollar, given the increased risks of COVID-19," they said.

Even if the Fed makes a more "soft" statement, delaying the taping will not necessarily hurt the US currency exchange rate, analysts at National Australia Bank believe.

"This can also easily play into the hands of the dollar, as it will be regarded negatively for risky assets, which will increase the demand for a protective greenback," they said.

"We think that the Fed's rhetoric may seem somewhat hawkish at the annual symposium this week. Therefore, the stability of the dollar may remain," Citigroup analysts said.

"We expect that the central bank will announce a reduction in QE next month. Although risky currencies are now recovering a little, but this rebound is unlikely to be significant," they added.

Taking advantage of the weakening of the dollar on a broad front, the EUR/USD pair regained the level of 1.1700, continuing on Monday the recovery that began on Friday from the lowest levels in 9.5 months.

However, soon it may remember that the foreign exchange market is not a one-way street.

On Thursday, the ECB will publish the minutes from the July meeting, at which it made updated forecasts of interest rates and unveiled a new monetary policy strategy aimed at maintaining inflation.

The document will be carefully studied for how the central bank's plans may change in the future after the end of the asset purchase program in March next year.

"The EUR/USD pair bounced from 1.1660 last week. The rebound may continue in the direction of the multi-month descending trend line at 1.1810. This is an obstacle the pair must overcome in order to move further. The next potential support levels are at 1.1640 and 1.1610," Societe Generale strategists noted.

"On Thursday, the ECB will publish the minutes from the July meeting. In addition, a number of representatives of the regulator will speak this week, including Francois Villeroy de Galo, who may repeat that it is too early to discuss reducing the purchases of PEPP bonds. This will be a test for the stability of the corrective jump of EUR/USD," they added.

The material has been provided by InstaForex Company -

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