FX.co ★ EUR/USD: The dollar will surprise the Fed

The prevailing opinion on the market, at present, is that inflation and US GDP will slow down, and the Fed will be extremely slow to normalize monetary policy. Coupled with the hawkish speeches of Bundesbank President Jens Weidmann, who fears the acceleration of the German CPI to almost 5%, these circumstances force investors to close short positions in EUR/USD. As a result, the pair left the area of 4-month lows. Is the trend ready to turn around again this year?

Indeed, Reuters experts lowered their forecasts for US economic growth in 2021 from 6.6% to 6.2%. Most of them expect that the Fed will begin to taper QE only in the first quarter of 2022 and will do it extremely slowly at $10 billion a month. Mathematics allows us to understand that the $120 billion program will be completed only by the end of next year. The slowdown in July core inflation from 0.9% to 0.3% MoM confirms the idea that the normalization of monetary policy is moving at a snail's pace.

Not everyone agrees with this. The Fed expects further progress in the US labor market. At the same time, there is no hint of helicopter money in Joe Biden's projects on new fiscal incentives for $4.1-4.5 trillion. In other words, there is no question of any weekly checks for $300. Americans will be forced to go to work, while wage increases could push inflation even higher. As, however, are the fiscal incentives themselves.

Dynamics of inflation and wages in the USA

If the core PCE remains at least 4% by mid-2022 and the economy approaches full employment, the Fed will be forced to act aggressively. The rapid rise in the federal funds rate is the key to further strengthening of the US dollar.

As for the eurozone, consumer prices there, of course, could rise to 3%, but it is difficult to imagine that core inflation would rise to at least 2%. Let me remind you that at present, the indicator is at the level of 0.7%. Moreover, judging by the economic expectations from the German ZEW institute, business activity and GDP of the currency bloc will start to slow down in the near future. This is probably due to the delta variant and the new restrictions.

Dynamics of business activity and economic expectations in the eurozone

If we add to this the epidemiological and economic problems that China is currently experiencing, it becomes clear that bulls on EUR/USD cannot count on a rally similar to what happened in the second half of 2021. The locomotives of global GDP in the face of the United States, China, and the Eurozone are clearly losing steam. At the same time, the United States looks better, and the dollar can take advantage of American exclusivity - the faster growth of the economy in North America compared to the rest of the world.

Technically, there is no reason to doubt the downward trend in EUR/USD. As long as the pair is holding below the fair value at 1.188, prompted by the market profile, the bears are in full control of the situation. In this case, the rebound from the moving averages and pivot levels near 1.1775, 1.1815, and 1.1845 should be used to form short positions.

EUR/USD, Daily chart