Markets reacted to the FOMC meeting as if they were genuinely surprised by the shifting of the federal funds rate hike from 2024 to 2023. Did investors really believe that the Fed would turn a blind eye to rising inflation and remain the most peaceful central bank in the world? If so, they were in for a serious disappointment, resulting in a 1.8% collapse in the EUR/USD over the course of two trading days.
To prevent the recurrence of the 2013 taper tantrum, the Fed promised to inform in advance of all changes in monetary policy. In fact, the Central Bank has let its guard down, and the fact that rates may be raised twice in 2023 has become a real thunderbolt for investors. Short positions on the US dollar began to collapse en masse, which led to the fall of the EUR/USD to the base of the 19th figure. The confidence of the market majority that the main currency pair will soon reach the level of 1.25 is gone, and Nordea predicts a fall in the euro to $1.15 by the end of the year against the background of the outperforming dynamics of US inflation over European inflation.
Dynamics of EUR/USD and inflation in the USA and the Eurozone
In my opinion, what happened was what should have happened. The Fed could not look at inflation at the level of the 1990s indefinitely. Its previous passivity could be explained by disappointing statistics on American employment, but in the near future, the situation in the US labor market risks a serious change. Judging by the dynamics of vacancies, the gap between potential and actual employment will be filled quickly. If this does not happen, wages will increase dramatically. Both options are potentially bullish for the US dollar.
Dynamics of vacancies and employment in the United States
How can the euro respond to the US dollar? Because of the Fed, investors forgot that thanks to the accelerated vaccination in the EU, a boom in economic growth is expected in the eurozone in the second half of the year. That Brussels successfully sold the first bonds from the European Rescue Fund, while the demand at the auction was off the scale. That after the ECB meeting, the members of the Governing Council recalled that the emergency asset purchase program will end in March 2022. That next year, the currency bloc will surpass the United States in terms of GDP growth. I do not think that the "bulls" on EUR/USD will just throw a white flag.
The key events of the week to June 25 will be the speeches of Christine Lagarde and Jerome Powell, as well as the releases of data on European business activity, the German business climate, and American orders for durable goods. The market needs the dust from the shocks to settle, and then it will determine the direction of further movement.
Technically, only the return of EUR/USD quotes above 1.198 will revive the scenario of the transformation of the blue "Shark" to 5-0, followed by the continuation of the rally to the targets on the "Wolf Wave". With this option, purchases will become relevant. If it is not possible to catch on to 1.198, there is a scenario with the implementation of the target by 88.6% according to the model of the red "Shark". It is located near 1.175, so we use a sell strategy on pullbacks.
EUR/USD, Daily chart
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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