Has the Euro climbed too high? The market is consolidating near 15-month highs, giving investors time to ponder this question. According to Goldman Sachs, the resilience of the American economy will serve as a buffer, preventing the U.S. dollar from falling too low. The bank predicts that EUR/USD will rise to 1.15 by 2024, which is not far from current levels. Is there much to gain from buying this pair?
The July rally of the Euro against the U.S. dollar is based on different inflation dynamics. In the United States, consumer prices have slowed to a comfortable 3%. Another step and they will reach the target level. In the eurozone, CPI remains at 5.5%, which continues to worry investors. As a result, Bloomberg experts have raised their forecast for the peak deposit rate from 3.75% to 4%. They also believe that inflation in the currency bloc will decrease at a slower pace than previously anticipated. The core indicator will reach 2.8% in 2024 and 2.4% in 2025.
Projected dynamics of the ECB deposit rate
In the United States, the monetary policy tightening cycle is nearing its end. Since its inception, the federal funds rate has increased by 500 basis points and will rise by another 25 basis points to 5.5% in July. The latest FOMC consensus estimate projected an increase to 5.75%, but it is unlikely to materialize. American inflation is slowing down too rapidly.
Thus, the divergence in monetary policy favors the bulls in EUR/USD. However, there are other advantages. On the buyers' side, the main currency pair is influenced by U.S. stock indices. Their rally strengthens global risk appetite and puts pressure on safe-haven assets such as the U.S. dollar.
European inflation dynamics
Rumors are circulating in the market that the Federal Reserve is creating a Goldilocks regime—a combination of sluggish economic growth and fading inflation. This is favorable for U.S. stocks and the euro. Indeed, Wall Street Journal experts have raised their GDP forecast for the United States in 2023 from 0.5% to 1%. The new estimate implies a soft landing rather than a recession, creating a favorable environment for risky assets.
Thus, the fundamentals support the upward trend in EUR/USD. However, concerns that the rally of the main currency pair has gone too far may trigger mass profit-taking by speculators and a pullback of the euro against the U.S. dollar. A correction would provide an opportunity to buy the regional currency at a lower price.
Recent highs could also be retested, leading to further upward movement. However, the most preferable scenario, in my opinion, is a small retracement that would allow entering long positions in EUR/USD.
Technically, on the daily chart of the main currency pair, a doji bar has formed after a sharp upward movement. This indicates uncertainty and can be played out by placing two pending orders. Buy EUR/USD from the level of 1.1245 and sell the pair from 1.12.