EUR/USD: from hope to disappointment

The single European currency continues to surprise, not bending under the influence of verbal interventions of the ECB and losing previous drivers of growth. According to Vice President of the European Central Bank Vitor Constancio, the current take-off of the EUR/USD is not justified from the fundamental point of view. The sluggish dynamics of inflation in December makes us talk about the need to maintain an ultra-soft monetary policy for a very long time. The head of the Bank of France, Francois Villeroy de Galhau, expressed concern over the rapid strengthening of the euro, and one of the main "hawks" of the Governing Council, Ewald Nowotny, said that the current dynamics of the single European currency creates obstacles to achieving the HCPI target of 2%.

Thus, the ECB's words on the possibility of revising the parameters of the quantitative easing program in the case of improving the eurozone economy's state should not to be taken as the driver of the EUR/USD growth. Even if the president of the Bundesbank, Jens Weidmann, says that QE will last until September, and rates will not be raised earlier than mid-2019, then what is the euro growing at? On the potential reduction in the volume of purchases of assets from €30 billion to €10-15 billion? It is doubtful that this will happen before inflation approaches 1.8%. Yes, oil can support consumer prices, however, when something similar happened in the past, Mario Draghi turned investors' attention on the weakness of core inflation.

What's the matter? Why does the market ignore the speeches of the FOMC spokespersons, calling for 3-4 acts of monetary tightening, an increase in the likelihood of a 3-fold hike in the federal funds rate in 2018 to 55%, strong macroeconomic data on US inflation, retail sales and industrial production? Restoration of the latter, incidentally, allows you to count on the continuation of the rally of major US stock indices.

Dynamics of the Dow Jones and Industrial Production Index


Source: Zero Hedge.

Perhaps the reason lies in the risk of a potential shutdown in the government after January 19? In my opinion, this is not so. At the end of 2017, concerns over the inability of the tax reform to pass Congress has exerted pressure on the dollar, but as soon as they were dispelled, the "bears" for the EUR/USD could not derive any benefit from this.

The main culprit for the current weakness of the "greenback" is its failure from last year. Optimistic forecasts in early 2017 gave way to complete disappointment at the end. The USD index lost about 10%, which was not a result of internal data or actions of the Fed, but to the successes of the currencies of other countries. In the end, the actual GDP data turned out to be better than the estimates, and the Fed raised rates not twice but 3 times. At the moment, the situation is reversed by 180 degrees, and there is a certain risk that history will repeat itself: excessive optimism about the bright future of the euro will turn into disappointment.

Technically, much will depend on the ability of the "bears" for the EUR/USD to maintain the level of 1,225. It turns out - the probability of a correction in the direction of 1.21 will increase. No - the initiative will pass to the "bulls", ready to continue the rally in the direction of 1.244 (161.8% in the pattern AB = CD).

EUR/USD, daily chart


The material has been provided by InstaForex Company -