Markets are rising on expectations. When investors are skeptical about the Fed's intention to raise the cost of borrowing to 5.25% and overestimate the prospect of an ECB deposit rate hike, EURUSD quotes should rise. At least in the short term. And the fact that the major currency pair could not permanently consolidate above 1.07 is an unfortunate misunderstanding. The Santa Claus rally in the U.S. stock market is ahead, which means that euro fans should prepare for a new attack.
Who was more successful at the last central bank meetings in 2022—Jerome Powell or Christine Lagarde? It would seem that the retreat of EURUSD from semi-annual highs and the fall of U.S. stock indices indicate that the Fed chairman was more effective. However, CME derivatives have not changed their expectations for the federal funds rate ceiling. They remained at 4.88%, even despite the higher FOMC forecast. The reason, most likely, is that the Fed has lowered its estimates on GDP and unemployment. It expects a recession and a reduction in domestic demand, which will reduce inflation. As a result, the central bank will not need to raise the cost of borrowing as high as it expects.
Lagarde, on the contrary, succeeded with her high-profile phrases that the ECB intends to play long and is ready to continue to take the same broad steps as in December and beyond, to convince investors that the deposit rate peak is higher than they expected. As a result, the indicator rose to 3.21%. The contraction of the differential with its U.S. counterpart is a bullish sign for EURUSD.
Dynamics of market-supposed peaks in central bank rates
Moreover, European business activity in December, according to the flash estimate, exceeded the forecasts, while the U.S. fell short of them. There is still a difference in the monetary policy of the Fed and the ECB and in the strength of the U.S. and eurozone economies, but it is narrowing, which allows EURUSD to lick the wounds suffered in 2022 and count on the development of an uward ptrend in 2023.
The fall of the U.S. stock indices, frightened by a series of disappointing statistics, put a spoke in the wheels of the bulls, but at the end of the year, a Christmas rally usually happens with the S&P 500. Investors are full of hope for the next year and are enthusiastically buying shares. If history repeats itself at the very finish of 2022, the euro may rise to 1.08–1.09.
Another thing is that there will be more evidence of an approaching U.S. recession in the first quarter. Weak data will pull U.S. stock indices down, which will create conditions for EURUSD to fall towards 1.04–1.05. Subsequently, the pair will rise to 1.1–1.12 by the end of 2023.
Technically, the implementation of the reversal pattern of Wolfe wave continues on the weekly chart of EURUSD. While the pair's quotes are above the 1.047 pivot point, it is necessary to remain focused on buying the euro. Therefore, we switch from short-term selling to longs formation on the rebound from the key support levels 1.0565, 1.0525 and 1.05.