EUR/USD remains in the hands of Fed and ECB.All Eyes On Fed And ECB
It was a disappointing year for EUR/USD bulls. EUR/USD started the year near the 1.2300 level but later found itself under strong pressure and declined towards 1.1200 before rebounding to 1.1300.The key driver for this move was the difference between Fed and ECB views on rates and inflation. While the Fed has already began to aggressively reduce its QE program and looks ready to raise rates several times in 2022, ECB remains dovish.
The ECB policy is easier to predict. Most likely, ECB will remain dovish. Inflation is less of a problem in the EU, while the recent wave of coronavirus and additional restrictions in European countries have likely put more pressure on the European economy. In this environment, ECB should continue to support the economy, which could lead to dovish policy throughout 2022.
In recent weeks, EUR/USD has been consolidating between the support at 1.1230 and the resistance at 1.1350. The direction of the move out of this consolidation will have a material impact on the near-term dynamics of EUR/USD.
From a big picture point of view, EUR/USD has enough room to gain additional downside momentum in case ECB remains dovish at a time when Fed begins to aggressively raise rates. There is a very strong support for EUR/USD in the 1.0500 – 1.0700 area, and a move below this support area will require very strong bullish catalysts for the dollar (or extremely bearish catalysts for the euro). However, a move from 1.1200 level to 1.0800 level does not look like an extreme scenario if U.S. rates rise fast enough.On the upside, EUR/USD needs to get back above the 1.1500 level to have a chance to develop sustainable upside momentum in 2022. Such a move would signal that markets expect some kind of policy normalization from ECB and will provide EUR/USD with a decent chance to get back to 2021 highs.
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