Image © Adobe Images
New research finds the Dollar rally has some significant upside to come, suggesting the Euro to Dollar exchange rate (EUR/USD) is not done falling.
According to Alex Kuptsikevich, FxPro's senior market analyst, the Dollar could only be half way through its current uptrend cycle and the EUR/USD could be on track for parity as a result.
Kuptsikevich's research finds the last time the dollar was at this level against a basket of the six most popular currencies was in April 2017. (Except for a brief period of stock market panic in March 2020).
"The Dollar Index peaked in the 103-104 area in both cases and has not traded consistently higher for the past 20 years," says Kuptsikevich in a recent note.
The dollar index - a broader measure of Dollar strength based on its performance against a basket of currencies - has this week moved above 100.
At the same time EUR/USD dipped below 1.08; further gains by the Dollar index would certainly be reflected in EUR/USD given this is the biggest constituent of the basket. (Set your FX rate alert here).
"History suggests that this rally has roughly passed the halfway point," says Kuptsikevich.
Above: Dollar index (DXY) at top, EUR/USD at bottom, prices at weekly intervals.
The analyst says during the previous two episodes the Dollar’s rise has been halted by the Fed, easing its policy or tone of commentary, as we have seen stock and commodity markets crash along with the USD rally.
"That is not the case this time, so the DXY is unlikely to stop near 103-104 as it has done in the last six years," says Kuptsikevich.
Currency analysts agree one of the key drivers to the Dollar's rally is the Federal Reserve's desire to raise interest rates in the face of mounting inflation pressures.
The Dollar Index's move above 100, and EUR/USD's simultaneous dip below 1.08, after Federal Reserve Bank of St. Louis President James Bullard said the central bank needs to move quickly to raise interest rates to around 3.5% this year and that it shouldn’t rule out rate increases of 75 basis points.
Bullard said "I wouldn’t rule it out" when addressing the prospect of raising rates by more than 50 basis points.
A 75 basis point hike would represent a dramatic sign of intent by the Fed to get on top of rising inflation, and is something markets were not anticipating until the comments introduced the idea.
The last time the Fed hiked by 75bps was in November 1994.
"We saw that the last three such impulses of dollar growth, which started in 2014, 1998, and 1992 caused the DXY to appreciate by about 25%," says Kuptsikevich.
Applying this pattern to the current case, Kuptsikevich finds the dollar has exhausted just over half of its upside potential and could strengthen as much as 110-112 on the Dollar index in the next few months.
"For EURUSD, this scenario sets up a plunge towards parity, the lows of the last 20 years. For USDJPY, it could spike to 140, which has not been seen since 1998. And for GBPUSD, a return to 1.2000, the lows of the Brexit-fear era," says Kuptsikevich.