The US dollar is experiencing the usual excitement before the Fed meeting scheduled for Wednesday. However, some volatility does not prevent it from staying in an upward trend.
The US currency is supported by the predominance of "hawkish" sentiments among the Fed representatives. According to experts, the regulator is ready to tighten monetary policy at a faster pace than expected. In case of strengthening of the "hawkish" sentiments of the representatives of the Fed, the US dollar will receive additional support for growth.
On Tuesday morning, the aforementioned currency gained altitude, trying to maintain its positions. It is around a weekly high against major world currencies, ahead of the euro, which was previously trading at the level of 1.1277. Currently, the EUR/USD pair is moving near 1.1282-1.1283, trying to stay at current levels.
The attempts by the pair to consolidate in the existing range did not lead to anything. The EUR/USD pair went back to low values, trading at the level of 1.1275 before the Fed and ECB meetings.
Many analysts fear "monetary" clashes between the leading central banks – the ECB and the Fed. Previously, the difference in their approaches to the monetary policy did not provoke serious changes in the global financial market. However, the extremely high inflation recorded in the US and the eurozone makes us overestimate the current risks. It can be recalled that US inflation was the highest in almost 40 years. This fact cannot be ignored, so the regulator will have to resist price pressure, which no longer fits into the "temporary" framework.
Against this background, investors fear a sharp slowdown in the economy in the event of an aggressive rise in the key rate in response to inflationary pressure. According to currency strategists at UBS Bank, the ECB's decision on the monetary policy will be in sharp contrast to the verdict of the Fed, whose course is aimed at curtailing monetary incentives. The bank believes that the implementation of such a scenario will bring down the EUR/USD pair to 1,1000.
"The Fed is clearing room for maneuver, preparing for an early rate hike, and this is sharply at odds with the monetary policy of the ECB," ANZ Bank said. In the short term, this mismatch benefits the US dollar. According to experts, differences in the assessment of inflation prospects and the position of central banks regarding the increase in rates contribute to the growth of the USD.
Meanwhile, the European currency continues to remain an outsider, although the ECB representatives support it in words. However, the euro is weakening every day, periodically rising, but then falling back into the price hole. The subsidence of the euro will increase if a new round of the COVID-19 pandemic begins and the authorities tighten quarantine measures again. Problems with gas supplies in Europe worsen the situation, and this further undermines the region's economy.
The ECB's indecision in curtailing incentives and raising rates prevents the euro from rising. The meeting of the regulator will be held on Thursday, December 16. Earlier, ECB president Christine Lagarde announced the preservation of the previous deadlines for the completion of the asset repurchase program. According to the schedule, this will happen at the end of March next year. According to analysts, the refusal to revise the monetary policy indicates that the ECB ignores the current growth in inflation.
The divergence in the strategy of the ECB and the Fed on key issues, namely the completion of stimulus programs and rate hikes, is shaking the markets. The ECB's possible rejection of moderate monetary tightening contributes to the emergence of "bubbles" in financial markets and threatens the entire banking system. Such a situation will bring a lot of unpleasant surprises to the EUR/USD pair. However, the strength of the US dollar will allow it to bypass any obstacles, including from central banks, which cannot be said about the weakened euro.