Neither the ECB nor the Fed was able to help investors clarify the prospects for EUR/USD. The European Central Bank is ready to unleash a currency war to keep the euro at the current level. But won't its verbal interventions become a blank shot in the air? The Federal Reserve was so eager to show that it was willing to sit on the sidelines for a very long time that it scared financial markets with gloomy assessments of the state of the US economy. The S&P 500 saw its worst daily fall since October, pulling down the major currency pair, but the bulls did not panic flight.
At first glance, there were more than enough prerequisites for a EUR/USD correction. The IMF painted an optimistic picture for the US economy, expecting that US GDP will grow by an average of 5% over the next three years thanks to massive monetary and fiscal stimulus. The United States will probably be able to avoid a recession in the first quarter, which cannot be said about the eurozone. The vaccination process in the EU is moving slower than in the US, which, along with divergence in economic growth, is an important trump card for the euro bears.
If we add to this the desire of the ECB to convince the market, which has practically forgotten about such an option as a rate cut, that it is wrong, then only one desire arises. Sell EUR/USD. The problem is that the global appetite for risk is too high and is likely to remain so amid close to record lows in US bond rates. As history shows, not a single major pullback of the S&P 500 has been implemented without prior growth in Treasury yields.
Dynamics of the S&P 500 and US bond yields
The US stock market is doomed to rally. Anyone who doubts this will incur losses similar to the hedge funds that have contacted GameStop. Cheap money from the Fed and Congress has turned ordinary Americans into investors who often ignore fundamental laws. In such an environment, safe-haven assets, including the US dollar, are having a hard time. Therefore, the potential for EUR/USD correction, despite divergences in monetary policy, economic growth, and vaccine spread, looks limited.
On the contrary, the euro bulls may have new trump cards in their hands. The start of vaccination turned out to be unsuccessful. But who knows what will happen next? There is a lot of criticism against the EU, Brussels is making more and more demands on drug suppliers, and progress will likely be noticeable very soon. And along with it, rumors about the lifting of lockdowns and the rapid growth of the eurozone's GDP will resume circulating. The acceleration of German inflation in January may deepen the split in the ranks of the Governing Council over the advisability of buying assets in the same volume, which is a bullish factor for the euro.
Technically, a breakout of the 1.208 support will activate the AB=CD child pattern with a target of 1.195. Due to the limited potential for correction, EUR/USD longs will become relevant in the event of a rebound from this level, or slightly higher - in case of unsuccessful assaults of supports at 1.199 and 1.204. A return of the pair above 1.221 will increase the risks of activating the AB=CD parent pattern and rebuilding the upward trend.
EUR/USD daily chart
