The EURUSD Eyes Retest of Parity as Fears of a German Recession Mount

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The minutes of the July FOMC meeting are due today and given the Fed’s recent message that positive incoming economic data will not shake the central bank from its tightening plans, the minutes of the meeting will likely be another opportunity to reinforce that message. Therefore, the hawkish surprise in today’s communication is the most likely outcome. The Federal funds estimate future prices in a rate cut next year from a peak of 3.6% to 3.2%, so there is clearly room for a sharp adjustment in rate expectations, which can support the dollar and push equities lower. The dollar rally has resumed ahead. of the release; the greenback index (DXY) is poised to retest the 107 level. Demand for long-dated US bonds relative to shorter-maturity bonds continues to break records; the inversion of the yield curve reached its most extreme state since August 2000: Such a change in the structure of the US market interest rate is usually accompanied by a strengthening of the dollar. Furthermore, this is a bearish factor for commodity currencies. The weakening of AUD and NZD on Wednesday against the dollar exceeded 1%, the selling was also fueled by a worsening of growth forecasts of the Chinese economy, one of the main trading partners for Australia and New Zealand. The euro trade exchange rate. fell to the lowest level of this year. The gas crisis and its consequences for the economy continue to be the main bearish factor for the European currency. Pessimism is also felt in economic reports. The ZEW sentiment index for the German economy fell to -55.3 points, the lowest level in 12 years: a recession in Germany in the second half of 2022 looks inevitable and it is reasonable to assume that there are few prospects for recovery in the EURUSD . After a month of consolidation, support at 1.01 is likely to be broken and we will see a move to parity in the near future. Inflation in the UK has exceeded 10% per year, hitting a 40-year high, according to the report published. today Market prices in more political tension from the Bank of England, interest rate derivatives expect the rate at 3.4% in March 2023 against 2.72% at the end of July. Greater room for maneuver for the BoE compared to the ECB is likely to drive the EURGBP further down to support at 0.8350. At the same time, the lower vulnerability of the US economy to a deficit in the natural gas market suggests that investors will continue to prefer the dollar over the pound sterling. The GBPUSD is also likely to test the strength of the key support level of 1.20 soon.

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