Aug 18, 2023

The US dollar has continued to rise in value against the euro, as investors become increasingly concerned about the economic outlook.

EURUSD–Daily Chart

EURUSD – Daily Chart

EURUSD is now testing the 1.0844 level, and a break below could see the pair fall to 1.07.

Core inflation data for the European economy will be released tomorrow, but it is a final reading of the 5.5% print and is unlikely to vary significantly. Investors are anticipating that the ECB and Federal Reserve will pause interest rate hikes, but the US economy is stronger.

The number of European businesses defaulting on their loans has reached its highest level since 2015, as higher interest rates make it more difficult for small businesses to repay them. Andreas Bruckner, European equity strategist at Bank of America, said: “Expectations of central banks keeping rates higher for longer have intensified, with some even pricing in a September Fed hike. Even strong UK wage growth figures this week have fueled concerns about inflation being stickier than expected, which would make it much more difficult to bring down to target.”

Following the surge in American share valuations this year, European investors have been investing more in US ETFs than in their own continent. According to Emmanuel Cau, equity strategist at Barclays, the eurozone needs to see disinflation and a return to growth for European stocks to improve.

Bruckner added that Europe is more reliant on the global growth cycle than other equity markets because it has an open economy and is more geared towards China. This is why the debt sustainability issue in China is also weighing on Europe.

European stocks fell on Thursday as disappointing corporate earnings added to concerns about the global economy.

The latest minutes from the Federal Open Market Committee (FOMC), the US central bank, have indicated that interest rates in the US could be raised in the near future.

According to analysts at Schwab Asset Management, the minutes of the Federal Open Market Committee (FOMC) meeting will likely reflect a consensus view among officials on whether they are leaning more dovish or becoming more neutral, leaving the door open for further interest rate hikes.

The US dollar continues to be the dominant currency against other major currencies, and the current climate of fear adds to its safe-haven appeal.

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