Dollar smile. History shows that the US currency is growing on the eve of a recession due to high demand for safe haven assets, falling after its start due to the enormous monetary stimulus of the Fed and, finally, strengthening again as the US economy surpasses its counterparts in terms of growth rate. Now is the time when the USD index has climbed to the level of a 20-year high, thanks to both sides of the smile and the increased interest of investors in safe haven assets and American exceptionalism. In such conditions, any attempts by the "bulls" on EURUSD to radically change the situation are doomed to failure.

It is generally accepted that most recessions are caused by central banks. They see an overheated economy and start raising rates to cool it down and bring inflation back to target. Figuratively, this is called removing the punch bowl, or a bowl of cheap liquidity, in the midst of a feast. This is what the Fed is doing in 2022. Since the beginning of the year, it has raised the federal funds rate from 0.25% to 3.25% and is ready to bring it to 4.25% or 4.5% by the end of December, which does not exclude the possibility of another step of 75 bps.

Fed rate forecasts

Although Jerome Powell doesn't say it outright, he doesn't rule out a recession. The Fed must stop inflation. Is there a painless way to do this? No! Bloomberg estimates that a rise in borrowing costs to 4.5% will result in the loss of 1.7 million jobs. If they rise to 5%, the figure will be even higher—2 million.

FOMC members are also well aware of the cost of defeating inflation. They predict an increase in unemployment to 4.4% and do not expect inflation to return to the 2% target before 2025. It has never happened in the United States for the unemployment rate to rise by half a percent without a recession.

When exactly it will come, no one knows. The labor market looks firm, as do household balance sheets due to fiscal stimulus during the pandemic. As a result, the period before the recession may last a very long time. And this, as we remember, is one of the sides of the dollar smile. Its rally is still far from over. Moreover, there is increasing talk on Forex that it is the American currency that is the only game in town.

What can the euro oppose to it? Gas prices in Europe are unlikely to fall much, and if the winter turns cold, the eurozone is likely to plunge into recession as early as 2022–2023. The tightening of the ECB's monetary policy would have saved the EURUSD if energy prices had not dominated the structure of inflation. The European Central Bank is powerless against them. Thus, the downward trend in the main currency pair has all the necessary conditions to continue.

Technically, on the EURUSD daily chart, a break of the lower limit of the fair value range of 0.991–1.004, followed by a retest, indicates the dominance of the "bears." We continue to adhere to the strategy of selling the euro against the US dollar with targets at 0.969 and 0.964, where important pivot points are located.