We expected that gains in the EUR/USD currency pair would be subject to profit-taking at any time, as the divergence in economic performance and the future of monetary policy tightening is still in favor of the US dollar in the end. The gains of the euro dollar last week reached the resistance level of 1.1495 before reaching that point. We recommended to sell the pair from the resistance 1.1490 and indeed it reached the entry level and the recommendation got +160 points, as the pair quickly collapsed to the support level 1.1330 and closed the weeks trading stable around the 1.1347 level.
US inflation figures were stronger than expectations and supportive of a stronger tightening path for the US central bank's policy.
Euro sellers ABN AMRO acknowledge that the recent developments in the European Central Bank are making their Euro outlook look extremely pessimistic and have therefore raised it. Half of the analysts at the lender and financial services provider see them as “bears on the euro” because their expectations for the single currency in the eurozone are much lower than expectations.
In fact, prior to their recent upgrades they were expecting the EUR/USD to head towards parity by the end of 2023.
The difference in policy between the US Federal Reserve and the European Central Bank is the main driver of the euro's outlook against the dollar, and this has recently shifted in favor of the euro. “Currently, expectations of rate hikes dominate the FX markets, and we expect this to continue for some time,” says Georgette Boyle, chief FX strategist at ABNA AMRO.
ABN AMRO says financial markets for 2022 expect four rate increases by the European Central Bank in steps of 10 basis points. It follows the European Central Bank's policy update in February where policymakers indicated that a rate hike in 2022 was now likely, marking an important step away from the Long-Term Negative Rate Policy (NIRP), which was introduced in 2014.
Meanwhile, markets are expecting the Federal Reserve to raise US interest rates by 25 basis points. Contrary to market expectations, ABN AMRO expects one rate hike of 10 basis points by the European Central Bank, and four rate hikes of 25 basis points by the Federal Reserve.
They say that the overall size of the EUR/USD move is likely to be less than they originally expected. Their new forecast for EUR/USD at the end of 2022 is 1.07 (up from 1.05) and at the end of 2023 they forecast 1.05, up from 1.0 previously.
On the other hand, economists at Commerzbank responded to the market consensus, which now expects the first rate hike from the European Central Bank to come before the end of 2022, which is supposed to be a source of support for the single currency in the eurozone. “The European Central Bank will raise interest rates for the first time as early as September,” says Yu Na Park Heeger, FX and Emerging Markets Analyst at Commerzbank. Another step must be taken in December.
According to the technical analysis of the pair: The recent move is still in favor of the bears' strength and control over the performance of the EUR/USD currency pair. The pair is closest to the support levels 1.1315 and 1.1265, which are important to change the general trend to a bearish one. On the other hand, according to the performance on the daily chart, the resistance 1.1455 will remain an important opportunity for the bulls to return to control again. The currency pair, as is the case for the forex currency market in general, is on an important date this week with the announcement of the content of the minutes of the last meeting of the US Central Bank and the statements of a large number of bank officials throughout the week.
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