While financial markets have been trying for months to find a dovish reversal of the Federal Reserve, the outlook of the world's largest central banks has been scrapped. They are well aware that monetary policy is acting with a time lag, and by tightening it aggressively now, they risk a deep recession later. Currently, it makes no sense to raise rates as quickly as before, they have already entered the restrictive territory. The question is how to convey this to investors. The Fed will be one of the first to try to do this.
Mere hints of a decrease in the growth rate of borrowing costs from a potential +75 bps in November to +50 bps in December turned out to be enough for a wave of rumors to sweep through the market that the USD index had peaked, and the greenback should start selling. But historically, the Fed and other central banks have raised rates by 25 bps, and 50 bps looked like a very big step. It looks suitable now, but the end of the cycle is not far off.
But the peak in rates will be reached not only by the Fed, but also by other central banks. According to Credit Agricole, the unexpected less aggressive tightening of monetary policy by the Bank of Canada than expected, the European Central Bank's hints at a slowdown in monetary restriction suggest that the advantage of the US dollar over other currencies will remain. It will be necessary to look at the economy, and far from everything is in order with it in the eurozone.
Inflation in the currency bloc reached a record high of 10.7% in October, exceeding the forecasts of Bloomberg analysts. At the same time, GDP in the third quarter sank by 0.3%, which is significantly different from its 0.8% growth in the second. The eurozone is in a state of stagflation, a combination of the highest prices in decades and anemia in economic growth. In such circumstances, it is extremely difficult for the ECB to make decisions, which is clearly evident from the diametrically opposite comments of the Governing Council officials.
The dynamics of inflation and GDP in the eurozone
According to the head of the Bank of Italy Ignazio Visco, the ECB should act gradually, depending on the data. Their significant deterioration will make aggressive monetary restriction unreasonable. On the contrary, his Slovak colleague Peter Kazimir called for raising the deposit rate above the neutral level as soon as possible, which is slipping away like a train leaving the platform.
When there is no agreement between the comrades, their business will not go well. A split in the ranks of the ECB at a time when the Fed continues to act as a single fist is bad news for EURUSD. The main currency pair is experiencing difficulties both due to the continued determination of the Fed, and with potentially strong statistics on the US labor market. Both events look positive for the US dollar.
Technically, on the daily chart, EURUSD is trying to return to the boundaries of the fair value range of 0.967-0.992. If it works out, the risks of going to 0.9845 and 0.9775 will increase. Thus, a breakout of support by 0.992 will be the basis for increasing the short positions formed from parity.