The US dollar (USD) has been celebrating since the Fed’s verdict on Wednesday evening on the extent of the hike in its key rate, while inflation remains very high (and worse than expected) in the United States in despite the downturn of recent months. EUR/USD (euro/US dollar) hit a new low at 0.9813 and “this is just the beginning”, warns IbanFirst, for which the next target is at the support level located at 0, 9753, close to its end-of-year target at 0.96, which “will certainly be reached before December” according to the currency specialist.
Tensions on wages, in services, on rents… While inflation is becoming widespread, hitting many parts of the American economy, “the Fed has clearly paved the way for the coming months”, underlines IbanFirst, while more rate hikes are on the way (probably 0.75 percentage points in November and 0.50 points in December). According to the dot plots (graph representing the estimates concerning the evolution of interest rates), the key rate at the end of the monetary tightening cycle will stand at 4.6% next March against 4.5% according to the previous estimate. If it is “a small change”, it is nevertheless “very significant”, for IbanFirst, because it is interpreted as a hawkish message by the market (in favor of an acceleration of the rise in the cost of money) .
The euro falls back below the dollar threshold
A possible deep recession could weigh significantly on inflation, in theory. But for now, the Fed is still not counting on an entry into recession or an explosion in the unemployment rate. “There is debate on this subject”, noted IbanFirst, for whom it “cannot be excluded that the combination of the inevitable entry into recession in the euro zone and the tightening of financial conditions in the United States is pushing the American economy into a prolonged contraction of activity for several quarters”.
However, even if this scenario were to materialize, the dollar could well play the role of safe haven, for lack of a credible alternative “in current market conditions”, judges IbanFirst, who fears a resurgence of volatility on the foreign exchange market , while “many central bankers are thinking about ways to fight against the fall of their national currency”, which may involve “direct intervention on the exchanges”. Already, the yen has been skyrocketing against the dollar for the past few hours…
The dollar hits a new all-time high against the euro
What does technical analysis say?
From a technical analysis point of view, our objective over a few months is the same as that of IbanFirst, ie 0.9570-0.96 dollars (major horizontal support dating from 2001-2002). The trend is bearish, as shown by the succession of descending peaks and troughs on the EUR/USD. The registration of a new low and the analysis of the Bollinger bands (a gauge of price volatility) militate in favor of a new “leg of decline”.
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Conversely, the European currency would encounter an obstacle at the level of the upper limit of the medium-term bearish channel (reinforced by the moving average at 67 days – descending blue curve -, see graph below) then at the important horizontal resistance of 1 $.02, in the event of a rebound. And in case of crossing this threshold, a confirmed rise of the EUR / USD (euro / dollar) beyond the major resistance of 1.0360-1.0370 (horizontal resistance and obstacle of the Ichimoku method) would put at hurt the background downtrend.
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Author’s declaration of interests