Doubts. That’s what ruined the euro. More precisely, it made EURUSD retreat. Investors were unsettled by the “hawkish” speech of FOMC member Christopher Waller, calling on the Fed to continue tightening monetary policy since there is no evidence of a sustainable move of inflation towards the 2% target, as well as the statement by Black Rock that the Federal Reserve has not finished raising rates. It will add another 50-75 basis points. And the market so believed in the end of the monetary restriction cycle! Could it be wrong?
The consensus forecast of Bloomberg experts assumes a rise in the ECB’s deposit rate to 3.75% with its peak maintained until the end of 2023. The assessment coincides with the opinion of the futures market and is already reflected in EURUSD quotes. At the same time, the rally of the currency pair was based precisely on the divergence in monetary policy: if the European Central Bank was expected to add 75 basis points to the cost of borrowing, the Federal Reserve was not expected to do anything at all. At first, it was assumed that it had already put an end to the tightening of monetary policy in March. Then there was a possibility of an additional 25 basis points in May. As soon as it increased to 86%, the dollar also grew.
Bloomberg estimates for the ECB’s deposit rate
The “bullish” drivers of EURUSD were not only the different speeds of monetary restriction by the Fed and the ECB but also the divergence in economic growth, which changed the balance of power in the securities markets of the Old and New World. After the fall in gas prices, Europe got rid of such concepts as the energy crisis and recession. The United States, on the contrary, was getting closer to a downturn, especially after the bankruptcy of several credit institutions.
Fortunately for the dollar, Wall Street Journal experts did not change the probability of a recession within the next 12 months. It remained at 61%. At the same time, 58% of respondents believe that the banking crisis has already ended.
Discrepancies in monetary policy and GDP growth increased the attractiveness of European assets and contributed to the capital flow from the New to the Old World. This process led to a leading dynamic of European stock indexes compared to American ones, which also laid the foundation for the EURUSD rally.
Dynamics of US and European stock indexes
Thus, the market had a clear narrative, thanks to which it was expected that EURUSD would rise to 1.13-1.14 in 2023. However, as soon as investors had doubts, they immediately rushed to return to the US dollar. The market continues to move on emotions. Can we assume that one comment from an FOMC member and the opinion of the world’s largest asset manager will overturn the upward trend in the main currency pair?
I don’t think this will happen, however, no trend is immune to corrections, no matter how strong it may be.
Technically, on the daily chart of EURUSD, the pair’s inability to hold beyond the upper boundary of the fair value range of 1.0765-1.101 became the first sign of weakness for the “bulls.” If support at 1.09-1.095 fails, the pullback risks gaining momentum towards 1.0825 and 1.0765.
The material has been provided by InstaForex Company – www.instaforex.com
Doubts. That’s what ruined the euro. More precisely, it made EURUSD retreat. Investors were unsettled by the “hawkish” speech of FOMC member Christopher Waller, calling on the Fed to continue tightening monetary policy since there is no evidence of a sustainable move of inflation towards the 2% target, as well as the statement by Black Rock that the Federal Reserve has not finished raising rates. It will add another 50-75 basis points. And the market so believed in the end of the monetary restriction cycle! Could it be wrong?
The consensus forecast of Bloomberg experts assumes a rise in the ECB’s deposit rate to 3.75% with its peak maintained until the end of 2023. The assessment coincides with the opinion of the futures market and is already reflected in EURUSD quotes. At the same time, the rally of the currency pair was based precisely on the divergence in monetary policy: if the European Central Bank was expected to add 75 basis points to the cost of borrowing, the Federal Reserve was not expected to do anything at all. At first, it was assumed that it had already put an end to the tightening of monetary policy in March. Then there was a possibility of an additional 25 basis points in May. As soon as it increased to 86%, the dollar also grew.
Bloomberg estimates for the ECB’s deposit rate
The “bullish” drivers of EURUSD were not only the different speeds of monetary restriction by the Fed and the ECB but also the divergence in economic growth, which changed the balance of power in the securities markets of the Old and New World. After the fall in gas prices, Europe got rid of such concepts as the energy crisis and recession. The United States, on the contrary, was getting closer to a downturn, especially after the bankruptcy of several credit institutions.
Fortunately for the dollar, Wall Street Journal experts did not change the probability of a recession within the next 12 months. It remained at 61%. At the same time, 58% of respondents believe that the banking crisis has already ended.
Discrepancies in monetary policy and GDP growth increased the attractiveness of European assets and contributed to the capital flow from the New to the Old World. This process led to a leading dynamic of European stock indexes compared to American ones, which also laid the foundation for the EURUSD rally.
Dynamics of US and European stock indexes
Thus, the market had a clear narrative, thanks to which it was expected that EURUSD would rise to 1.13-1.14 in 2023. However, as soon as investors had doubts, they immediately rushed to return to the US dollar. The market continues to move on emotions. Can we assume that one comment from an FOMC member and the opinion of the world’s largest asset manager will overturn the upward trend in the main currency pair?
I don’t think this will happen, however, no trend is immune to corrections, no matter how strong it may be.
Technically, on the daily chart of EURUSD, the pair’s inability to hold beyond the upper boundary of the fair value range of 1.0765-1.101 became the first sign of weakness for the “bulls.” If support at 1.09-1.095 fails, the pullback risks gaining momentum towards 1.0825 and 1.0765.
The material has been provided by InstaForex Company – www.instaforex.com
Related Posts: