Market Overview

21 January 2022

Fed and ECB Shoot Down the Euro

In order to understand the movement of EURUSD it is important to look at the inflation rates in both the United States and in Europe. The Consumer price index (CPI) data released for the Eurozone on Thursday also provides important economic input for the movement of the currency pair to be explained.

The CPI for Europe rose moderately in December to 5.0% year-on-year from 4.9% in November compared to 7% in the United States for the same period. These figures show that the pace at which prices rose in Europe was not so steep as in the U.S. and therefore the European monetary policymakers may not see price hikes as such an important issue. This could mean that

 the European Central Bank (ECB) may see no urgency in tighten the monetary policy as opposed to the U.S. Federal Reserve (Fed) that is already considering when the first hike will be scheduled.

On the other hand, the European economy is lagging behind the United States as the Gross Domestic Product (GDP) within the European Union (EU) only rose by 3.9% year-on-year while economic growth in the U.S. was up by 4.9%. Also, the unemployment level in the EU is at 7.2% while in the U.S. it is at 3.9%.

Consequently, the minutes from the ECB’s monetary policy meeting held on December 15-16, 2021, published on Thursday, suggest that further monetary stimulus will be released by the ECB and that no interest rate hikes are on the immediate horizon. However, the ECB did cut the amount of stimulus it is pumping into the economy at the December meeting but extended its bond-buying until at least late 2022. In contrast the Fed has said it will stop its bond buying stimulus program this March and is expected to increase its interest rates for the first in March. CME FedWath Tool suggests the probability of the rate hikes to 0.25-0.5% in March is 91.6%. which is up from the 78.3% probability last week. Investors suggest the Fed may raise interest rates again in May with a probability of 49.3%, and these numbers are also growing fast. The investor community has a consensus that the Fed will hike rates three or five times in 2022. A shrinking of the massive $8.8 trillion Fed balance is also expected to start this year. This is an opposite procedure to money printing when the central bank sells bonds from its balance to the market reducing overall monetary supply.

This distinction between two major central banks makes the U.S. Dollar look more attractive against the single European currency in the near term. This is confirmed by the technical picture. A downward trend in the EURUSD led the pair to 1.1180 in November 2021. A correction to the 1.15000 now seems to be limited as bulls failed to push the Euro above this limit and therefore justifies the downward trend. The Euro may now gain a downside momentum from 1.13500-1.13700 to the level at 1.12000 with some brief stops on its way there.



Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus
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