As the US dollar rises from the dead, bears enter the EUR/USD market

In Tokyo, the EUR/USD exchange rate is trading at a premium due to a stronger US dollar that has been gaining ground since the middle of the week. Constant political turmoil in the United Kingdom and hawkish monetary policy in the United States have depressed investor sentiment. The euro has risen from a two-week low against the dollar to trade at 0.9765 today.

The benchmark 10-year Treasury yields rocketed to 14-year highs, while the dollar touched another 32-year high against the yen, approaching a level where the Bank of Japan and Ministry of Finance may intervene, according to some traders. Overall, the markets are uneasy, which is increasing demand for the safe-haven U.S. dollar as traders predict a 75-basis-point rate hike by the Federal Reserve on November 1 and 2, one week before to the Fed's blackout period. In addition, a hike of 50 to 75 basis points is anticipated for December.

"Risk sentiment deteriorated overnight. As analysts at ANZ Bank stated, the market's initial relief at the UK's decision to repeal the majority of their mini-budget was replaced with anxiety as the focus returned to the global inflation backdrop and the aggressive rate hikes that will be required to combat an increasingly persistent inflation pulse. In this regard, the outlook for the British economy remains uncertain, which may distract some of the spotlight from the eurozone, which has dominated market focus and negative feedback loops for the majority of 2022. Near the end of September, the euro reached a high of 0.9280 and is in bullish zone as long as it remains above 0.8600. "How the Eurozone performs this winter will be a significant element in determining whether the EUR can gain momentum against the GBP in the coming months," said Rabobank analysts.

"We have been pessimistic on GBP for many months, and although there has been a lot of negative news recently, the UK's economic and political outlooks remain too uncertain for us to become bullish on GBP. A few days ago, our three-month forecast of 1.06 seemed more distant. However, we have not yet seen sufficient good news to change this upward.

The second estimate of the September Consumer Price Index for the European Union was revised downward to 9.9% YoY, just below the first estimate of 10%. The core inflation rate was confirmed to be 4.8%.

In the interim, the net long positions for the euro decreased after reaching their highest levels since early June the previous week. Rabobank analysts noted, "While ECB pronouncements have boosted the chance of future rate hikes in the coming months, concerns are developing about the impact of rising energy costs on the economy (and the burden on Germany's industrial sector in particular)."