From disappointment to surprise and back again. That's how investor sentiment changes in financial markets. In the first half of the year, the dominant narrative was the looming recession and a sharp slowdown in inflation, which would force the Federal Reserve to make a dovish pivot and weaken the position of the U.S. dollar. But in the summer, investors' perspective shifted. Everywhere you turn, there's talk of a soft landing, as the U.S. economy pleasantly surprised, and the PCE didn't want to decline rapidly. It's interesting to see how an increase in the chances of a hard landing will change the balance of power in the EUR/USD pair.

The dollar has taken a significant slice of the pie, not only thanks to the strength of its labor and real estate markets. For a long time, the U.S. economy appeared to investors as the cleanest shirt in the pile of dirty laundry. Now, they're even saying it doesn't belong in the washing machine. Meanwhile, the eurozone and China continue to disappoint, and the "bears" for EUR/USD don't need to make much effort. The pair is already moving down confidently, thanks to the exceptionalism of the U.S.

Dynamics of business activity in the eurozone and China

It's hard to imagine what could stop the bears for EUR/USD at this point. Even if the U.S. economy continues to cool down, reigniting discussions of a recession, the weakness of China and Europe will support the U.S. dollar as a safe-haven currency. Let's recall the theory of the dollar smile: the USD index rises when things are going exceptionally well in the United States or when things are going poorly in the world.

Indeed, Beijing's stimulus measures have not yet improved the dire situation. The latest statistics on business activity and foreign trade in China confirm this. So does the continuing decline of the yuan. According to MUFG, if USD/CNY quotes surpass their previous year's peak, the USD index rally will receive a new boost.

Dynamics of the Chinese yuan and the USD index

Therefore, to stop the bears for EUR/USD, it won't be enough for U.S. macroeconomic statistics to deteriorate. Improvements in the eurozone and China are required. And that currently appears to be quite problematic. The currency bloc is teetering on the brink of stagflation and recession, and the European Central Bank's intention to raise deposit rates further frightens fans of European assets. Beijing is making titanic efforts to save the yuan, but a weak economy cannot sustain a strong currency.

However, EUR/USD can't continue to fall indefinitely; the pair clearly needs a correction. The ECB meeting scheduled for the week of September 15th could give the bulls some respite. It's worth considering both the possibility of a deposit rate hike to 4% and its maintenance with "hawkish" comments from ECB President Christine Lagarde.

From a technical standpoint, the weekly chart of EUR/USD continues the implementation of a corrective pattern called "Three Indians" within the context of a long-term upward trend. This pattern is formed thanks to Wolfe Waves. Prices are heading towards the convergence zone of 1.0485-1.057, from where a rebound is expected. For now, we stick to the strategy of adding to shorts formed from 1.08.