The euro has not only returned to nearly 8-month highs but has also outpaced the U.S. dollar in the G10 currency race. EUR/USD quotes have been rising for five out of the last six trading days, but it's unlikely that the bulls are this strong. The reality lies in the weakness of the bears. Thus, the August rally of the major currency pair is a story of a weak "American."

The eurozone economy leaves much to be desired. Bloomberg experts predict that business activity data for August will show it is close to stagnation. The Bundesbank does not foresee a recession in Germany following the unexpected contraction of its GDP in the second quarter but notes that the recovery of the leading economy in the currency bloc will be extremely slow.

Meanwhile, unions are demanding salary increases of 7-19% over the next 12 months, with strikes and labor shortages serving as leverage. Wages rose by 4.2% and are likely to continue increasing. This will keep core inflation significantly above the 2% target and force the ECB to gradually normalize monetary policy. ING believes that market expectations for a 68 bps monetary expansion in 2024 are exaggerated. In reality, there is likely to be only one deposit rate cut, by 25 bps.

Despite the sell-offs in July and August, the U.S. dollar still appears very high, especially when considering the real effective exchange rate. The Fed is transitioning from tightening monetary policy with a subsequent plateau in the federal funds rate to easing it. Such periods are always negative for the U.S. currency.

Dynamics of the Real Effective Exchange Rate of the U.S. Dollar

Treasury yields are falling, reducing the attractiveness of such securities and leading to capital outflows. Conversely, stock indices are soaring, signaling an improvement in global risk appetite. The U.S. dollar suffers as a safe-haven asset. How long will this last?

In reality, the S&P 500 is rising on expectations of dovish rhetoric from Jerome Powell at Jackson Hole, and these expectations are clearly overstated. The same applies to the prospects of a 100 bps cut in the federal funds rate in 2024, which the futures market is anticipating. Once these hopes turn into disillusionment, the situation in EUR/USD risks flipping.

Will the bears wait for the Fed Chair's speech to apply the "buy the rumor, sell the fact" principle? Or will they find a reason to sell the major currency pair sooner? Both scenarios should be carefully considered. Even statistics on European business activity could trigger a butterfly effect.

Technically, on the daily chart, EUR/USD shows a strong uptrend and a breakout above the fair value range of 1.084–1.1050. The first sign of weakness from the bulls and a reason for short-term selling will be if the euro falls below the pivot level of $1.1065.