The EUR/USD pair continues to sway on waves of uncertainty, as the pandemic continues to cast a shadow on the prospects for economic recovery on both sides of the Atlantic.
At the same time, the US and European central banks tend to build complex verbal mazes instead of clarifying their next steps.
Since there were no clear signals from the European Central Bank last week, and it is unlikely to arrive until December, market participants will wait for them from the Federal Reserve, deciding which of the currencies – US or European - to give preference to.
According to the consensus forecast of analysts surveyed recently by Bloomberg, the euro exchange rate against the US dollar will practically remain unchanged by the end of the year and will reach $1.19.
In turn, OCBC maintains a negative attitude towards the EUR/USD pair, expecting its decline to 1.1700.
"Recently, the pair demonstrated its inability to once again take the barrier at 1.1900 and turned around, testing the support at 1.1800," the bank's specialists noted.
"The rhetoric of Christine Lagarde in the style of "folding, but not turning" emphasizes the dovish attitude of the ECB, offsetting a small tilt towards a more hawkish course, noted in late August-early September. Now the market will revise its bullish expectations for the EUR, which will put pressure on the single currency," they added.
Credit Agricole strategists maintain a neutral outlook for the euro in the near future, but expect its growth in the medium term.
"The resumption of foreign investment inflows to the eurozone stock market and the bonds of the EU recovery fund may attract inflows to the undervalued euro and, thus, more than outweigh the negative impact of the ECB's dovish attitude on the single currency," they said.
According to the bank's forecast, the EUR/USD pair will trade at the level of 1.2000 at the end of this year and will reach the level of 1.2400 by the end of 2022.
EUR/USD faced resistance in the area of 1.1910 and rolled back, but while the pair is staying above the support of 1.1750, it will retain the growth potential, which will increase in the event of a breakthrough above 1.1910, Societe Generale analysts believe.
"Let's see if the pair will be able to form an increasing minimum relative to the August low at 1.1660. The nearest support is marked at 1.1750-1.1730 (the Fibonacci correction level is 61.8%). As long as the pair remains above it, it may try to grow to 1.1855 and 1.1910. In the event of a breakdown of the last level, the growth rate should accelerate," they said.
Economic growth in the eurozone is now playing on the side of the bulls for EUR/USD, as well as the fact that the eurozone is ahead of the United States in terms of vaccination rates and looks advantageous in terms of reducing the incidence of COVID-19.
"The dollar may weaken against the euro due to the current account surplus of the eurozone and the huge US deficit. The eurozone economy also turned out to be stronger than expected," said Nissay Asset Management.
On the other hand, the weak spot of the single currency is the monetary policy of the ECB.
Low interest rates in the eurozone, the increase of which is unlikely to be expected before the end of 2023-the beginning of 2024, allow the euro to maintain the status of a popular funding currency, which even with an increase in demand for risk leads to its weakening.
Recall that last Thursday, the ECB left interest rates unchanged and said that it would reduce emergency bond purchases in the fourth quarter.
Given that the decision to reduce PEPP was already included in the quotes, it did not impress the bulls for the euro, who vainly hoped that the head of the ECB, Christine Lagarde, would announce a firm intention and a clear path to curtailing monetary support.
Instead, Lagarde expressed expectations that the December meeting of the central bank will be a big event, and all measures to stimulate the economy will be reviewed.
As a result, the euro stayed afloat only due to the fact that the ECB raised its own forecast for eurozone GDP growth for 2021 from 4.6% to 5.0%, warning that risks to growth prospects are still associated with the continuation of the pandemic.
At the same time, Lagarde noted that the recovery of economic activity in the region is becoming more intense, adding that the European economy may return to the pre-pandemic level by the end of the year.
However, the optimism with which the ECB president charged the single currency did not last long.
Already on Monday, the EUR/USD pair sank to the levels that it last reached on August 27. At the same time, the greenback reached two-week highs, rising above 92.80 points.
This happened against the background of increased expectations about the imminent curtailment of monetary incentives from the Fed, despite the increase in the incidence of coronavirus in the United States and signs of a slowdown in the national economy.
According to the latest review of the business climate called Beige Book, the US central bank notes that economic activity in the country has declined due to COVID-19.
According to the New York Times, the daily number of new cases in the United States on average keeps just below 150,000.
Traders are closely monitoring the development of the situation with the coronavirus in the country, as it affects the Fed's plans regarding the curtailment of anti-crisis measures to support the economy.
Recent comments by Fed officials suggest that the central bank intends to start reducing the volume of bond repurchases by the end of this year.
"I would be satisfied if the Fed's curtailment of asset purchases began this year and continued throughout the first half of next year. The decision on the timing should be made by the FOMC, " said the head of the Federal Reserve Bank of Cleveland, Loretta Mester.
She believes that the increase in the incidence of COVID-19 will put pressure on the growth rate of US GDP, but it is unlikely to undermine the recovery of the national economy.
As an argument in favor of curtailing purchases, Mester pointed to progress towards the inflation targets and hiring rates set by the Fed.
At the same time, the representative of the Fed noted the presence of upward risks for the inflation rate.
"It is likely that higher prices may lead to an increase in long-term inflation expectations to levels that exceed our target level of 2.0%, and this may put upward pressure on the pace of price growth," Mester said.
According to the results of a survey conducted in August by the Federal Reserve Bank of New York, American consumers on average expect that inflation will be 4% in three years, compared to 3.7% in the previous month. This is the highest figure since 2013, when the study began.
The day before, the greenback could not hold on to high levels and turned down, ending yesterday near 92.60 points.
Apparently, market participants decided to lock in profits ahead of the publication of US inflation data for August.
Meanwhile, the EUR/USD pair bounced off two-week lows and returned to the 1.1810 mark by the close of trading.
On Tuesday, the greenback slightly declined against its main competitors, and the EUR/USD pair changed hands at $1.1815, while investors were waiting for the release of US inflation data in search of clues about the timing of the Fed's tightening policy.
The fall in the USD accelerated after the US Department of Labor reported that in August, annual inflation in the country slowed for the first time since October 2020 – to 5.3% from 5.4% a month earlier. On a monthly basis, consumer prices rose by 0.3% after an increase of 0.5% in July.
This set of data pushed the US currency to weekly lows around 92.30 points, as it confirmed the opinion of those members of the Fed, including its Chairman Jerome Powell, who speak about the temporary nature of the increase in consumer prices and, therefore, support the idea of starting the process of reducing QE at the end of the year.
Before US traders started trading at the beginning of the session, the EUR/USD pair reached a new weekly high at 1.1845, but then retreated, and the greenback recovered to 92.60 points.
This may signal that investors are still betting on the normalization of monetary policy in the US and expect that the Fed may announce a reduction in bond purchases at the September meeting.
The report on retail sales in the United States scheduled for publication on Thursday may fall into the piggy bank of such expectations if it turns out to be strong, since the chances of a hawkish shift in the Fed's position in this case will be higher.
The fall in consumer spending for the second consecutive month will increase the likelihood that the procedure for curtailing QE will begin in November, and not in September.
Given that the next period of silence begins on the eve of the September FOMC meeting and the strength of the bears and bulls for EUR/USD is approximately equal, then everything will depend on the incoming data from the United States.
As for the technical picture, the initial resistance was marked at 1.1850, followed by a stronger level that held back the recovery attempt earlier this month at 1.1880 and a double top at 1.1910, which protects the psychologically important level of 1.2000.
Support is located at 1.1800 (last week's level), 1.1770 (weekly low), 1.1740 and 1.1725.