The European Central Bank’s stance in fighting inflation has been decisive, with ECB President Christine Lagarde stating that there will be another rate hike in July. However, the ECB has lowered its economic forecast for the current year from 1.0% to 0.9% and for the next year from 1.6% to 1.5%. In contrast, the Federal Reserve raised its economic forecast for the current year from 0.4% to 1.0% and lowered the unemployment rate forecast from 4.5% to 4.1%.
These factors indicate weakness in the euro in the medium and even long term. The US debt has increased by $497 billion since the debt ceiling was raised, reaching $31.954 trillion according to the Treasury Department as of June 14th. Why aren’t the markets declining? We believe that the stock market’s growth is driven by small players who do not feel the outflow of capital from the external circuit, as well as share buybacks by companies. The situation is similar in the currency market, as yesterday’s trading volumes were even lower than on Wednesday. At the same time, we see that US bond yields, despite significant issuances, are not changing significantly in price (yields).
The current yield on 5-year government bonds is 3.936%, the same as a week ago. Despite the complexity of the US monetary system, the conclusion is simple: when corporations are forced to switch to government bonds and reduce buybacks, and when the problems of the European economy become more evident, the markets will feel the full weight of the pressure on the dollar. We don’t think this will happen in some distant future; the process is already underway, and the euro’s growth is driven by small players who will soon be pushed out of the market.
The 1.1016 level is the nearest prospect and is also considered as a strong resistance for the pair. This is the upper boundary of the price channel that began in May 2021. The pair could reach the target next week with a reversal into medium-term downward movement, surpassing May’s low (1.0636).
On the 4-hour chart, the price is starting to consolidate above the target range of 1.0910/30, and the Marlin oscillator is declining from the overbought zone, indicating a discharge, after which the pair may rise further.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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