Euro corrects errors. Forecast as of 23.07.2021

Euro corrects mistakes. Forecast as of 23.07.20212021-07-23 2021-07-23 Dmitri Demidenkologo2021-07-23 2021-07-23 Euro corrects mistakes. Forecast as of 23.07.2021Dmitri Demidenkologo

Christine Lagarde found the words to support the ECB doves, which caused a shock for the EURUSD. The euro will be under pressure until the Fed meeting. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

One wrong move can undermine many months, and even years, of efforts to return the economy to the trend after the recession. The ECB doesn’t want to make the same mistakes again. Christine Lagarde promised that the European Central Bank has learned from the errors of past crises and won’t derail the current economic recovery by withdrawing emergency support too early. The EURUSD crashed.

Both the Fed and the European Central Bank have their own fears. Jerome Powell and his colleagues are worried so as not to provoke another taper tantrum by an unexpected announcement of the QE tapering, as did the former chairman of the Federal Reserve, Ben Bernanke, in 2013. Christine Lagarde and her team are not willing to raise too early, as did the former president of the ECB Jean-Claude Trichet in 2011, driving the euro-area economy into the recession, which is still present.

Dynamics of interest rates of ECB and Fed

Source: Bloomberg

The euro reaction to the outcomes of the July meeting of the Governing Council looked like a cardiogram: a rise following the message that the European central bank intends to raise rates only if inflation reaches the 2% target, and a sharp drop in response to the message about a transition period, during which the regulator is ready to put up with the CPI above target. Given the current forecasts for consumer prices, this means that the ECB will hardly tighten its monetary before 2024-2025. In the context of a possible federal funds rate hike already in 2022, the EURUSD downtrend should continue.

The ECB's new symmetric 2% inflation target looks like old wine in a new bottle, the communication has changed, but the ECB remains very dovish in general. The dispute among the ECB members indicates a clear discontent expressed by the hawks. Bundesbank President Jens Weidmann and Belgian Governor Pierre Wunsch opposed new European Central Bank policy guidance, according to Reuters source familiar with the matter. One member of the Governing Council, whose name was not disclosed, even left the meeting, slamming the door. However, the fact that Christine Lagarde managed to charm the majority testifies to the victory of the doves.

Now, investors are focused on the upcoming Fed meeting. According to the IMF, the Fed is very effective and must continue to communicate its views carefully to ensure that the withdrawal of monetary stimulus does not shock financial markets and the global economy. At a meeting on July 27-28, the central bank will decide when to start tapering the QE and when to complete this process.

Weekly EURUSD trading plan

I suppose the signals of scaling-back of the US quantitative easing program will press the EURUSD down. If the price breaks out the support at 1.1755, the pair will continue falling to 1.1715 and 1.1665, it could be relevant to sell. Hold down the shorts entered at level 1.1825, moving the stop-loss to the breakeven.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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