Analysts said that serious problems in the EUR/USD pair are caused by an imbalance between both currencies. Bank of America experts point to the excessive overvaluation of the US dollar and the lack of attention to the euro.
Before the Fed meeting, the issue of a fair assessment of the euro and the US dollar is extremely relevant. According to Bank of America reports, the US currency turned out to be overvalued by investors this month, while the euro is undervalued. Analysts believe that this upsets the balance in the EUR/USD pair.
The calculations by Bank of America's currency strategists demonstrate that the current greenback estimate is 0.7 points higher than the long-term average, while the euro is 1.1 points lower. These indicators are negatively affected by rising inflation expectations in the United States (up to 6%) and extremely high inflation, which has reached peak values for the last almost 40 years. The current situation increases the degree of tension between the US dollar and the euro. On Wednesday morning, the EUR/USD pair experienced noticeable volatility, trading around the level of 1.1270.
By the middle of this week, the US dollar maintained its growth, unlike the euro amid expectations of the most important Fed meeting. Despite the growing tension, the dynamics of the American currency are almost unchanged in relation to other key currencies. The euro, on the contrary, has to make a lot of efforts to stay afloat. Experts are afraid of increasing dissonance in the EUR/ USD pair, although there are no serious prerequisites for this.
In anticipation of the Fed meeting, many analysts turned to the Fed's updated dot forecast, the so-called dot plot. Experts carefully analyze the data presented in order to predict the rate of increase in the key rate in 2022. According to the previous dot plot published in September 2021, the federal funds rate should be increased once (until December 2022). However, a lot has changed now, so the markets are confident that in the coming year the rate will be raised twice (25 bp at each meeting).
Bank of America experts believe that the regulator is able to surprise the markets and raise rates following the meeting on Wednesday, December 15. The implementation of such a scenario will lead to a shock and force you to radically rebuild. On the contrary, if the completion of the asset purchase program goes twice as fast, that is, it will be completely curtailed in March 2022, then the markets will remain calm. It can be recalled that this option is the most expected.
At the same time, there is a possibility of another scenario: if the regulator does not raise rates at the current meeting, then it will have to be done twice (by 0.50%) in March next year. The reason for this decision is the overheating of the US labor market. Therefore, most market participants expect the regulator to raise rates in the second half of 2022. At the same time, many investors do not rule out a weakening of inflation next year, despite the persistence of price pressure.
A surprise for the market may be the updated December "dot" forecasts of the Fed (dot plot), which allow for the probability of a threefold rate hike in 2022. The implementation of such a scenario will help the US dollar strengthen its position, but stock markets will be under pressure.