The counteroffensive of EUR/USD bulls failed as soon as it began. During the Asian trading session on Monday, the bulls of the pair tried to develop a corrective growth against the background of the release of fairly strong macroeconomic data from China (in the field of industry and retail sales). However, the corrective pullback turned out to be very weak. Bulls “went off the course” having passed only 20 points up (the opening price is 1.1447, the high of the day is 1.1464). Traders wilted during the European session, taking a modest profit. A little later, the bears seized the initiative for the pair again, guided by the dovish theses of European Central Bank President Christine Lagarde. She announced a semi-annual report to members of the European Parliament's Committee on Economic and Monetary Issues. The topic of the report was directly related to monetary policy, so the speech provoked increased volatility for the pair. And this volatility is expected not in favor of the euro.
The head of the ECB has once again stated that she is an adherent of a soft course. According to her, any measures to tighten monetary policy conditions at the stage of economic recovery in the eurozone “will do more harm than good.” Therefore, she urged “not to count on an interest rate increase next year,” since energy prices will significantly decrease in the first half of 2022 (and, consequently, inflation indicators will turn down). She did not talk about the prospects of a rate increase in 2023, due to the remoteness of the moment. But at the same time, Lagarde stressed in a rather categorical form that monetary policy will not be tightened within the framework of 2022.
On the one hand, the head of the ECB voiced the already familiar rhetoric, which she voiced quite recently – at the final press conference after the October meeting. On the other hand, hawkish expectations regarding possible actions of the ECB have recently increased in the market. For example, according to Capital Economics, traders expect a rate increase of 10 basis points in the fall of next year. If Lagarde had tightened the tone of her rhetoric today, hawkish expectations would have increased significantly. But the head of the ECB remained true to her position: no talk of a rate hike – at least until 2023.
Such a “cold shower” sobered many market participants: the EUR/USD pair turned 180 degrees again and went to the lows of this year, to the level of 1.1430. At the moment, this target is a support level that corresponds to the lower line of the Bollinger Bands indicator on the D1 timeframe. If the bears settle below this target, then the 13th figure will appear on the horizon, the conquest of which will be only a matter of time.
The opinion is taking root in the market that the Federal Reserve will have to tighten the parameters of monetary policy next year, given the 30-year inflation high that was reached in the United States in October. Many indirect indicators suggest that price pressure will only increase in the near future, negatively affecting the daily lives of Americans. And at the moment the situation is not the best. In particular, the US consumer confidence index in November fell to a 10-year low (the indicator fell to 66.8 points, while last month it reached 71.7 points).
Another component of the release is also interesting: inflation expectations for the medium term (that is, the next year) rose to 4.9% in November. This indicator is gradually increasing throughout almost the entire year. And here it is necessary to recall the phrase of Fed Chairman Jerome Powell, said at the end of September. Speaking to Congress, the head of the Fed said that the US central bank “should consider raising rates if it sees evidence that rising prices are forcing households and companies to expect higher prices to take root, creating more stable inflation.”
Comparing macroeconomic reports in the field of inflation, inflation expectations of Americans, a significant decline in the consumer confidence index and the position of some representatives of the central bank on this issue, it can be assumed that at the December meeting, the rhetoric of the Fed representatives will tighten, as well as the rhetoric of Powell. It is likely for Powell to allow a rate increase in 2022 if inflation continues to show a spasmodic growth.
In my opinion, the market is already playing out the implementation of this scenario, acting ahead of the curve. Many experts are confident that the US central bank will not sit idly by, “waiting out the storm.” Earlier forecasts of the Fed did not come true: inflation by the end of the year not only did not slow down, but was able to test 30-year highs. Salaries are also growing at a pace: according to the latest data, the average salary level has increased by 4.9% – this is a peak for the last 20 years.
In other words, the divergence of the Fed and ECB rates is coming to the fore again, increasing pressure on the EUR/USD pair. Today's speech by Lagarde in the European Parliament served as an additional reminder of the existing uncorrelation of positions.
At the moment, the bears of the pair are trying to settle below the support level of 1.1430 (the lower line of the Bollinger Bands indicator on the D1 timeframe). Given the strength of the downward movement, it can be assumed that bears will succeed in their plans. The next price barrier is located quite close – this is the psychologically important mark of 1.1400. Any corrective spikes can still be used as an excuse to open short positions to the above “round” support level.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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