Disappointing data on US inflation, a peace-loving Jerome Powell, US stock indexes that do not tire of rewriting historical highs, and the retreat of COVID-19 helped the EUR/USD bulls to counterattack in the second week of February. Mario Draghi, who is now known as the Messiah, also contributed to the triumph of the euro. But in the old days, the former head of the ECB did nothing but drown the single European currency.
Vaccinations and the seasonal decline in the number of coronavirus cases have allowed investors to wonder what the future of financial markets will be. If in 2018-2019 they were rocked by trade wars, and in 2020 - by a pandemic, then what awaits us after defeating it? Most likely, monetary policy will again become the main driver of Forex exchange rate formation.
The goal of any Central Bank is to manage inflation. If consumer prices rise too quickly, monetary policy needs to be tightened. On the contrary, the rising risks of deflation create grounds for mitigating it. In this regard, the relationship between EUR/USD quotes and the inflation differential in the Eurozone and the US is quite logical. In January, the European CPI was a pleasant surprise, its American counterpart, on the contrary, disappointed, which became one of the key drivers of the rally in the main currency pair.
Dynamics of EUR/USD and inflation differential
In both cases, the dynamics of consumer prices were influenced by temporary factors - a change in the tax system in Germany and too cheap air tickets to the USA. In the medium term, the inflation differential is likely to go down, which makes the potential for a rally in EUR/USD limited. Unless, of course, central banks intervene in the matter.
This primarily concerns the Fed. According to Nordea Markets, due to the rapid growth of US GDP and inflation, in the summer, the FOMC will start talking about curtailing QE, which Jerome Powell and his colleagues are currently trying to avoid. The head of the Federal Reserve said that the Central Bank does not even think about abandoning the current monetary policy. But one day they will have to do it.
Most likely, the normalization in the US will start faster than in the eurozone, which limits the potential for a rally in EUR/USD, but it is too early to think about it. Thanks to the seasonal recession of COVID-19, vaccinations, and the exit of European economies from lockdowns, the pair is quite capable of growing, at least above the base of the 22nd figure. Even the explosive growth of the US economy should not scare the bulls. The US and China are the locomotives of global GDP, whose recovery in 2021 will keep the global risk appetite high and help weaken the dollar as a safe haven.
Technically, the Wolfe Wave pattern was activated on the daily chart of the EUR/USD with targets at 1.221 (projection from point 5 to line 1-4) and 1.225 (expected intersection of quotes with line 1-4). The main objective of the bulls is to stay above the pivot level at 1.208. A rebound from this support or an update of the February high at 1.215 is a reason to buy the euro.
EUR/USD, daily chart
