FX.co ★ EUR/USD: Euro's gradual movements are more effective than the US dollar's surges

The US currency, which has fallen again after some macro statistics, finds it difficult to maintain balance in the EUR/USD pair. On the other hand, the euro is having a hard time keeping up with the US dollar, so it prefers to move slowly but surely towards achieving its goal.

Currently, the market is evaluating the US inflation data released yesterday. According to the report, consumer prices in the country in December 2021 increased by 0.5%, accelerating to 7% year-on-year. The key index gained 0.6% over the month, rising to 5.5% year-on-year. As for the prices excluding energy carriers and food, more than 1.7% was added in three months.

Based on the data obtained, economists concluded that high inflation penetrates into the very core of the economy. In this situation, the Fed has no choice but to raise interest rates in March 2022. The regulator fears not only soaring inflation but also the "overheated" US labor market. The Fed officials consider high inflation a significant threat to a full economic recovery, so they are ready to raise interest rates since there is no longer a need for emergency monetary support.

As a response to the published macro data, the US dollar sharply declined. It is worth noting that the EUR/USD pair passed through the upper border of the range 1.1200-1.1350 again before the release of the report. To date, the upward movement of the pair continues. The EUR/USD pair rose by 0.5% immediately after the release of inflation data, leaving the level of 1.1400 behind. On Thursday morning, it was trading at the level of 1.1444, trying to break new borders.

The US currency has been consolidating in a wide range of 1.1250-1.1350 for quite some time, so an exit from which will give it a new impulse. It is possible that this breakthrough will determine the trend of the EUR/USD pair for the coming months. According to analysts, the lateral movement of the pair has ended. The EUR/USD pair entered an upward spiral, intending to consolidate in it. Staying in the same range for two months turned out to be unfavorable for the euro and relatively positive for the US dollar. The coming changes are related to the upcoming Fed rate hikes, planned four times this year. As for the ECB, it is still hesitating to make a final decision on this issue. According to preliminary estimates, the EU's economic growth in the first quarter of 2022 will be insignificant amid the new wave of COVID-19 and the gas crisis in Europe

However, the ECB's delay may turn out to be a strategy. If the world central banks admit that the stimulus measures in the economy are over and everything should return to pre-pandemic levels, then the ECB will overtake the Fed. At the moment, the key problem of the European regulator is extremely high inflation, which requires huge resources to overcome.

However, many currency strategists believe that the ECB's actions are not as simple as they seem at first glance. According to Marco Valli, an economist at UniCredit, the key points of the ECB's current strategy were formed even before the pandemic.

"From the point of view of the differences in the construction of monetary policy between the Fed and the ECB, the latter's position looks less dovish than is commonly believed," M. Valli emphasizes.

UniCredit analyst calculates that the ECB's ending the emergency stimulus by March, the closure of new credit lines by June, and a decrease in long-term asset purchases by the fourth quarter of this year, will allow the European regulator to return to pre-pandemic levels by October 2022. Valli believes that the implementation of such a scenario will help the ECB to be ahead of the Fed by a year.

The European regulator's great carefulness on the verge of its slowness forms false ideas about it. With a favorable set of circumstances, the ECB will overtake its American counterpart. However, experts stressed that it is unknown how positively this will affect the European economy.

According to preliminary estimates, the euro is expected to rise in the coming days, and will likely reach the level of 1.2000 by the end of the first quarter of 2022. The gradual moves of the euro may be more effective than US dollar fluctuations (up and down). Analysts summarize that the strategy of slow but steady progress will allow the euro to reach new peaks.