Both the ECB and the Federal Reserve are interested in weaker regional currencies. Unlike the European regulator which speaks open about this preference, its American counterpart is poised to take practical measures. The following moves have been implemented so far: an emergency cut of the funds rate, a massive QE program, and a new approach to targeting an average inflation. Citing Jerome Powell, this policy is an efficient tool for the recovery of the national economic output. Nevertheless, the market doubts whose approach is the most powerful. Meanwhile, investors are in the wait-and-see mood. As a result of this cautious approach, EUR/USD has got stuck in a trading range.
In theory, massive fiscal expansion boosts inflation. However, in practice there is a long path until inflation reaches the target level. This monetary policy encourages improvement of financial conditions, including the stocks, credit market and Forex. Indeed, the better the markets operate – the better is the chance of fast inflation acceleration.
Financial conditions in the US and core CPI
Owing to a rate cut to 0.-0.25% and asset purchases of $100 billion, the US Fed ensured that the yield curve of benchmark Treasuries dropped to historic lows. Besides, such measures encouraged a rapid recovery of the US stocks and more narrow credit spreads. One knotty problem has not been solved yet – the overvalued US dollar. In case the central bank can push it down, inflation will get into gear. The question is still open how high inflation could climb.
Financial conditions in the US
How to ensure progress in the challenging task of weakening one's own currency? Perhaps, the best option would be upgrading the outlook for GDP and inflation that is beneficial to the stocks. The grim rhetoric is also a good tool. It would be a nice idea to stress uncertainty about the economic recovery due to the COVID-19 resurgence and the presidential election. The divergence in the economic growth will be advantageous for the EUR/USD bulls. The survey on Germany's and the eurozone's PMIs for September will shed light on the EUR prospects.
So, the Federal Reserve has stated a clear-cut forward guidance. On the other hand, investors are confused about the ECB discontent with EUR' strength. The level of 1.2 seems to be the red alert, so the ECB will not allow EUR to surpass it. Personally, I doubt that the ECB will venture into forex interventions. I guess it can afford only verbal interference. Well, anything can happen on Forex! As a result, EUR/USD could get trapped in a trading range of 1.17 – 1.2 as a medium-term consolidation. The pair will be able to escape this range on condition of strong statistics from the eurozone or very poor data from the US. I reckon the eurozone's PMI, Germany's business sentiment index or US durable goods orders are not that case.
Technically, if the bears are able to hold EUR/USD below support of 1.1765, the pair is running a high risk of forming the pattern called Three Indians and the related ABC correction. Meanwhile, it makes sense to buy EUR/USD on a breakout of resistance at 1.188 with narrow targets within 100-150 pips.
EUR/USD, daily chart