The EURUSD trades have been focused on the Fed for a long time. The US central bank has been taking active steps, frequently changing its stance. It is about time investors looked at the ECB, isn’t it? Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
Roller-coaster. That is how the EURUSD market moved, falling below 1.123 and returning to the previous levels. It seems natural. Investors are not sure what the Fed will say at the next meeting. The ECB decision on the future monetary policy seems to be a mystery. In addition, as Christmas approaches, liquidity is leaving the market, which increases the risks of sharp movements in one direction or another for no apparent reason. In such conditions, conservative traders leave Forex together with liquidity, while aggressive ones, on the contrary, try to fish in troubled waters.
Obviously, the main reason for EURUSD’s almost 8% fall from the May highs is the divergence in monetary policy. The ECB continues to adhere to the mantra about the temporary nature of high inflation. Conversely, the Fed has retired the word “transitory,” taking the first step towards normalization and willing to speed up the QE tapering. The problem is that at the turn of autumn and winter, there were three events that could change the ECB stance.
First, the euro-area inflation has been up to 4.9%, an unprecedented level since the currency bloc establishment, more than double the 2% target. Second, the omicron has emerged, risking exacerbating supply chain problems and thus making high prices remain for a long term. Finally, the Federal Reserve has abandoned the idea of the temporary nature of high inflation. The ECB can well follow the Fed’s example.
Dynamics of euro-area inflation
Source: Financial Times
The ECB officials sound more and more hawkish, and investors could learn that, on December 16, the European Central Bank will announce the end of PEPP in March but say nothing about the ramp-up of the traditional quantitative easing program, the APP. If QE has outlived its usefulness, as most central banks in the world, led by the Fed, believe, why should the ECB continue buying assets, further accelerating the already rather high inflation? Coupled with an increase in CPI forecasts, the abandonment of the APP expansion will be a hawkish surprise from the ECB, which will certainly support the EURUSD bulls.
Furthermore, the euro-area economy is export-led. The better the world economy performs, the stronger the euro is. Therefore, the euro has been up and down in sync with the yuan for most of its existence. Currently, the yuan has reached its highest level against the US dollar since May 2018, so the EURUSD looks oversold.
Dynamics of euro and yuan
Source: Trading Economics
Weekly EURUSD trading plan
Suppose most of the negative associated with the divergence in monetary policies has been priced in the euro-dollar exchange rate, and the ECB could provide a hawkish surprise, the EURUSD downtrend may not resume. The chances of medium-term consolidation are increasing. Following the widening of the trading range 1.127-1.135 down, the EURUSD could cover the equal distance up. It is relevant to trade intraday with narrow targets.
Price chart of EURUSD in real time mode
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