EUR/USD drills lower as Fed signals more hikes (Daily analysis 17.08.2023)

The US dollar continues to trade firm. The EUR/USD eroded the 1.09 mark as Fed signalled it's likely not finished raising interest rates. Although it may pave the way for more short-term dollar strength, the long-term USD downtrend should remain intact.

The US dollar's strength is supported by a renewed belief that the Fed has not said its last word and will raise interest rates after the summer holidays. Following the latest US inflation data, the pricing of a September hike fell to 10%. Such a low-hanging bar of expectations created asymmetric risks and was an opportunity for the dollar to strengthen. In the first part of the week, the US currency was supported by good retail sales data but also by reviving concerns about the health of the Chinese economy.

The most recent positive stimulus for the USD, but also the impetus for a sell-off in government bonds and a deterioration in investment sentiment, was the minutes of the FOMC meeting in July. The paper made it clear that most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy. As a result, the euro-dollar exchange rate continued to push local lows. On Wednesday, a very important level near 1.09 was breached, meaning that the dollar exchange rate has fully recovered from the July plunge. Moreover, if the recent reshuffle is not erased at the end of the week, the probability of extending the USD's rebound by another 2% will increase. This does not change the fact that the USD exchange rate should remain in a downward trend when viewed more broadly.