While the entire investment world is frozen in anticipation of the release of U.S. inflation data for December, let's talk about leading and lagging cycles in economic growth and monetary policy. Without them, there would be no trends in EURUSD. The Fed was the first to start raising rates, which resulted in the USD index rally to 20-year highs. However, now, the ECB is catching up and the Fed is finishing up, which allows banks and investment companies to forecast the euro to rise to $1.1 and even to $1.15.
The evidence of lagging cycles in Europe compared to the U.S. is not only a different start of monetary restrictions, but also different dynamics of inflation. In the United States, consumer prices in December are likely to slow down for the sixth month in a row, moving away from a peak of 9.1%. The peak is definitely behind, which allows the Fed to slow down to 25 bps at the February FOMC meeting. In the eurozone, the picture is different. The CPI decline has only been in place for one month, and consumer prices could easily go up again if the ECB relaxes. It simply has to raise the deposit rate by 50 bps at the next Governing Council meetings.
Different speeds of monetary restrictions underlie not only the expected ceilings on the cost of borrowing in the U.S. and the eurozone, but also at the heart of the EURUSD upward trend. It's no joke to say that at the beginning of 2022, the market estimated the peak of the deposit rate at -15 bps, the federal funds rate at 133 bps. Now there is a completely different picture.
Dynamics of Fed and ECB Rate Ceilings
If the Fed started earlier and is still more successful in fighting inflation, then it should finish earlier than the European Central Bank. CME derivatives are not counting on a "dovish" reversal of the Federal Reserve in 2023 for nothing. Despite all its "hawkish" rhetoric, including phrases that the work is not finished yet. In fact, most of the work is done. At the same time, investors assume that the reduction in the cost of borrowing in Europe will begin only in 2024. Lagging cycles in action!
The dynamics of the expected rate cuts by the Fed and the ECB
What does this mean? In my opinion, this is about a change from an era of strong dollar to an era of strong euro, which is likely to last about two years. In this regard, Morgan Stanley and Deutsche Bank's forecasts of EURUSD rising to 1.15 during 2023 do not look anything fantastic. The major currency pair is quite capable of returning to the 1.2–1.25 area next year. No matter how it reacts to the U.S. inflation data for December.
Technically, the implementation of the Wolfe Wave pattern continues on the EURUSD weekly chart. The target of the upward movement is located at the sky-high mark of 1.28. The potential of the rally is far from being exhausted, so you should stick to the strategy of buying the euro against the U.S. dollar on pullbacks. The nearest supports are located at 1.058 and 1.050. As long as the quotes of the pair are above them, the situation on the market is completely controlled by the bulls.