On Friday, the euro licked its wounds after falling by 1% against its American counterpart the day before. This was largely due to the fact that the results of the European Central Bank's October meeting did not impress investors, and data on the dynamics of US GDP for the third quarter turned out to be stronger than previously expected.
According to the results of Thursday trading, the EUR/USD pair lost more than 110 points during the day and ended the session around 0.9960.
The latest rally in risky assets, which include the single currency, was supported by expectations that the Federal Reserve would respond to weaker economic data by easing aggressive rate hikes.
The same expectations were the main reason for the dollar's fall earlier this week to the lowest values since September 20.
The greenback was able to recoup losses somewhat after latest data showed that US GDP grew by 2.6% year-on-year last quarter, putting an end to two consecutive quarterly cuts that raised fears that the world's largest economy is in recession.
Analysts on average expected US GDP growth of only 2.4%.
Talk that the Fed will abandon its hawkish position, starting with the December policy meeting, has led to a decline in the dollar in recent days, and the recent USD rebound from five-week lows looks quite natural, experts say.
"A small profit-taking at this stage is not unheard of. Since Monday, the euro exchange rate against the US currency has increased by about 2.2%, so over the past two days we have had a fairly large movement of the dollar," RBC Capital Markets analysts noted.
While the greenback showed a vigorous recovery on Thursday, the euro came under pressure and sank below parity with the dollar after the announcement of the ECB's verdict on monetary policy and subsequent comments by ECB President Christine Lagarde.
Why did the EUR/USD pair react negatively to the ECB's decision?
Firstly, the central bank raised the key rate by 75 basis points, but this has already been fully taken into account in the quotes.
Secondly, Lagarde gave vague instructions on the ECB's future steps. She said that new rate hikes are coming, but the rate of increase in the cost of borrowing will be determined from meeting to meeting, depending on the incoming statistical data.
According to Commonwealth Bank of Australia strategists, the main surprise was Lagarde's comments that the central bank has already made significant progress in curtailing the stimulus policy.
The money market took these comments as a sign that rates in the eurozone may not rise as high as previously thought.
Traders are now predicting that rates in the currency bloc will peak at 2.6% next year, which is below expectations of about 3% seen recently.
Thirdly, it was difficult for Lagarde to deny the approach of the European recession.
Economic activity in the eurozone is likely to have slowed significantly in the third quarter of 2022, and the ECB expects its further weakening during this year and early next, Lagarde said at a press conference on Thursday.
At the same time, she acknowledged that the risk of an economic downturn is growing due to a sharp rise in energy prices and higher interest rates, but noted that national governments should support their most vulnerable citizens during the crisis.
"Everyone has to do their job. Our job is price stability. We have to do what we have to do. The central bank should focus on its mandate," Lagarde said.
Fourth, the recent growth of the EUR/USD pair was mainly caused by the potential turn of the Fed towards slowing down the pace of rate hikes due to problems in the US economy. Nevertheless, the latter is still in the best shape, as shown by US GDP data for the third quarter. And Lagarde's comments put everything in its place.
On Friday, the dollar was holding the positions won a day earlier against its European competitor, which is having difficulty attracting bulls.
"At the moment, it is difficult to understand what is causing the weakening of the dollar right now. The Fed has not yet reached the marginal rate, the US economy looks a little more stable than the economies of some other countries," JPMorgan analysts noted.
While the greenback may consolidate ahead of the Fed's policy meeting next week, the fundamental background for it remains positive, according to analysts at Brown Brothers Harriman.
In their opinion, concerns about the global recession and the aggravation of geopolitical tensions in Europe should only support the demand for the US currency.
Fivestar Asset Management analysts are also not ready to accept a halt in the growth of the dollar.
"We don't think we've seen a turning point for USD. This probably won't happen until we have a clearer idea of how much the Fed will raise rates," they said.
The greenback looks overbought, but the broader factors supporting it are still in place, HSBC economists say.
"It is worth remembering that the dollar is overbought based on a long-term real effective valuation. This may hinder the significant growth of the US currency; however, until the broader driving forces – global growth, risk appetite and relative profitability – demonstrate more significant changes, it may be premature to call for a weakening of the USD," they said.
HSBC expects that the dollar's upward trend will continue, and it will try to overcome the upper limit of its recent trading range of 110-115.
According to the bank's forecast, in the coming months, the world's most popular currency pair will challenge the 0.9500 level.
"We expect the euro to weaken against the dollar, challenging the $0.95 level in the coming months. The increased risk of recession in the eurozone, which is created by the ECB's struggle with inflation, may also lead to a depreciation of the EUR. Risk aversion is another force that can pull the single currency down," HSBC strategists said.
ABN Amro analysts believe that the EUR/USD pair will end the year at the level of 1.00.
"The energy crisis and recession in the eurozone, combined with a more aggressive trajectory of rate hikes in the US compared to the eurozone, are likely to keep the euro under pressure against the dollar this year. When the financial markets calm down a bit again, a decrease in demand for the greenback as a "safe haven" may lead to a recovery of EUR/USD. Our forecast for the pair at the end of 2022 is 1.00," they said.
TD Securities economists remain cautious about the EUR/USD pair in the near term, as the momentum of global growth worsens.
"We remain cautious about the EUR/USD pair, as the momentum of global growth continues to decline. A move below 0.9900 should be seen as confirmation of a return to the downward channel, while a push to the 1.0200 mark is likely to limit growth," they noted.
Specialists of Pictet Wealth Management also adhere to a cautious approach towards the euro in the short term.
They argue that the dollar may strengthen slightly due to the Fed's focus solely on fighting inflation and the impact that tightening monetary conditions may have on global risk appetite.
"Given the high volatility, it is difficult to determine specific levels, but retesting the September lows with the EUR/USD pair will not surprise us," Pictet Wealth Management said.
Danske Bank economists expect the main currency pair to head towards the lower part of the 0.9000-1.0000 range.
"After the ECB rate hike by 75 bps and the central bank's public recognition of stagflationary risks (upward risks for the economy and upward risks for inflation), the market is likely to maintain a negative attitude towards EUR/USD. This theme of stagflation and the fact that higher European interest rates remain a negative factor for the single currency is in good agreement with our long-standing positive view of the dollar, and we have repeatedly observed such a market reaction. In this regard, we continue to forecast the EUR/USD rate in the lower part of the 0.9000-1.0000 range," they said.
As for the current picture, the initial support for EUR/USD is 0.9920 (50% Fibonacci retracement level), followed by 0.9900 (50-day moving average) and 0.9850 (61.8% Fibonacci retracement level).
On the other hand, the nearest resistance is at 1.0000 (the Fibonacci retracement level is 23.6%). If the pair turns this level into support, it may aim for 1.0050 and 1.0100 again.
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