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.

 

Disclaimer:

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

Mark Goichmann
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

Open Demo Account
I understand and accept the Privacy Policy and agree that my name and contact details can be used by TeleTrade to contact me about the information I have selected.
23 International Awards
Have a question?

We are ready to assist you in every step of your trading experience
by providing 24/5 multilingual customer support.

Follow us

Risk Warning: Trading Forex and CFDs on margin carries a high level of risk and may not be suitable for all investors. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Prior to trading, you should take into consideration your level of experience and financial situation. TeleTrade strives to provide you with all the necessary information and protective measures, but, if the risks seem still unclear to you, please seek independent advice.

© 2011-2022 Teletrade-DJ International Consulting Ltd

Teletrade-DJ International Consulting Ltd is registered as a Cyprus Investment Firm (CIF) under registration number HE272810 and is licensed by the Cyprus Securities and Exchange Commission (CySEC) under license number 158/11.

The company operates in accordance with the Markets in Financial Instruments Directive (MiFID).

The content on this website is for information purposes only. All the services and information provided have been obtained from sources deemed to be reliable. Teletrade-DJ International Consulting Ltd ("TeleTrade") and/or any third-party information providers provide the services and information without warranty of any kind. By using this information and services you agree that under no circumstances shall TeleTrade have any liability to any person or entity for any loss or damage in whole or part caused by reliance on such information and services.

TeleTrade cooperates exclusively with regulated financial institutions for the safekeeping of clients' funds. Please see the entire list of banks and payment service providers entrusted with the handling of clients' funds.

Please read our full Terms of Use.

To maximise our visitors' browsing experience, TeleTrade uses cookies in our web services. By continuing to browse this site you agree to our use of cookies.

Teletrade-DJ International Consulting Ltd currently provides its services on a cross-border basis, within EEA states (except Belgium) under the MiFID passporting regime, and in selected 3rd countries. TeleTrade does not provide its services to residents or nationals of the USA.

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Choose your language/location