Investors want to sell the US dollar, though they are very cautious about going short. This sentiment is seen through a market response to the US inflation data for March. Later on, EUR/USD climbed above 1.09 in anticipation of the EB policy meeting. In the first case, even a downtick in the core CPI was enough for a decline in yields of US Treasuries and the US dollar index. In the second case, the victory of the bulls was short-lived.
Investment ideas look fresh at first glance. Then, they get hackneyed. Obviously, the downtrend of EUR/USD is based on the divergence in economic growth in the US and the EU. Another cause is the differential between monetary policy and rhetoric of the US Fed and the ECB. The question is whether the market has priced in an aggressive rate hike of 50 basis points in May and a faster pace of further rate hikes. The ECB could have made a surprise statement, dropping a hint about the completion of QE program in June, not in July as expected by most experts polled by Bloomberg. The ECB did not want to withdraw stimulus ahead of schedule. As a result, EUR slumped to the two-year low.
When making forecasts for forex instruments, what matters a lot is to predict policy moves that are factored in market quotes and figure out whether a central bank is able to implement its goals and this come to market expectations. CME derivatives suggest that the US Fed will increase the key interest rate to 2.5%, the neutral level, in 2022. The FOMC is determined to fulfil their agenda. In contrast, the ECB will hardly be able to raise the deposit rate by 70 basis points as investors are anticipating.
Expectations of increasing policy rates by central banks emitting G10 currencies
To be sure, if US inflation peaked in March and is set to slow further, the Fed will not need to act as aggressively as is currently expected. And this is a reason for the joy of "bulls" on EURUSD. They can regain the upper hand also for the reason of Emmanuel Macron's victory in the April 24 presidential election. However, until then, the euro is likely to remain under pressure due to political uncertainty.
Let's not forget about geopolitics. So far, Germany has been actively resisting the embargo on Russian petroleum products. It's easy to explain. In case of imposing the ban on Russian oil and gas imports, the German economy will lose about €220 billion, which is equivalent to 6.5% of GDP, and plunge into recession. Thus, the expansion of sanctions against Moscow is a reason to sell EURUSD.
In my opinion, before the end of April-beginning of May, when the president is elected in France, the Fed will announce a 50 bp rate hike. Besides, the combat for Donbass will reach its climax. So, the attacks of the euro bulls are unlikely to bring results. Everything is possible in the future, including a breakdown of the downtrend.
Technically, the exit of EURUSD beyond the lower limit of the fair range at 1.085 indicates the weakness of the bulls. If they fail to push the price above the convergence zone of 1.0835-1.085 in the near future, the currency pair is likely to extend its fall towards the pivot levels at 1.072 and 1.066. Under such conditions, the best strategy is to sell on the rebound from the resistance levels at 1.0835 and 1.0850, or during an update of the intraday low at 1.0785.
EURUSD, daily chart