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EUR/USD - The Dollar is again on the Rise

The price of the US Dollar across the market has been poor this week excluding the last 20 hours. The US Dollar index had declined on both Monday and Tuesday. However, the US Dollar index, which provides the value of the US Dollar against 6 currencies, is again on the rise this morning.

The price of the US Dollar index has increased by 0.30% and the EUR/USD has declined by 38 PIPs during this morning’s Asian Session. However, when we switch to weekly performance we can see that the EUR/USD remains slightly higher than the weekly market open due to the increase on Monday and Tuesday. So why has the EUR/USD suddenly changed its trend?

EURUSD - 22.06.2022.jpg

Well, it is actually the Federal Reserve coming to the rescue again. The market is being influenced by comments made last night by the St Louis Fed President. He advised that the aim of the Central Bank’s actions is to have the same impact as in the 1990s rate hike. Mr Bullard said that the result of the tightening of monetary policy then became an economic contraction, but also laid the foundation for serious economic growth in the second half of that decade. In other words, the Regulator is attempting to slow the economy in order to lower demand. Investors took this as a hawkish sign and that the Fed plans to continue increasing rates until they see a significant change in the economy.

In addition to the above, traders are also preparing their trades for the Federal Reserve Chairman’s testimony to the US Senate. This is scheduled for this afternoon and tomorrow. Traders are anticipating further clarification on the intention of the Fed, more specifically they are hoping for an indication as to whether the Fed will increase by a further 50 basis points or 75 basis points.

Furthermore the CEO of Deutsche Bank, Mr Sewing, yesterday spoke about both the risks involved in the EU and US economy. He advised that both regions are facing a high probability of a recession, as central banks are forced to aggressively tighten monetary policy to fight inflation. The CEO advised that he agreed with both increasing interest rates because if this action was not taken there would be harsher economic conditions.

A member of the European Central Bank also commented on the risks of an “inflation psychology” in the region, when the consumer increases spending, trying to buy a product before the price rises, and businesses raise selling prices, expecting that the growth in demand will continue further. This is something which has specifically been experienced with Petrol and Diesel. These economic elements only add to inflationary pressures, and fighting them through rate hikes is even harder.

The issue with inflation psychology and panic purchases is that it is also harder for businesses to determine the true level of demand. The ECB also stated that the high level of savings has also contributed to the level of demand remaining high even as inflation becomes unattractive.

So we can see here how the fundamental picture has changed the sentiment of traders which is also illustrated in the price. Currently, the price movement has formed a full price wave with the last 20 hours not showing signs of a significant retracement or correction. The price has also crossed downwards to form the first “lower low” but has also now approached the most recent support level. This is something traders will be looking at taking into consideration.

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