The EUR/USD pair stayed above the support level of 1.1850 (lower line of the Bollinger Bands on the daily chart and the upper border of the Kumo cloud on the weekly chart), preventing sellers from entering the level of 1.17. In turn, buyers managed to organize an upward correction, marking the level of 1.1922 yesterday. This price movement was unexpectedly promoted by the ECB President, Christine Lagarde, who spoke to members of the European Parliament's Committee on Economic and Monetary Affairs on Monday. Since the topic of the report was directly related to monetary policy, all the attention of traders was focused on its rhetoric especially amid the recent statements by the Chief Economist of the ECB, Philip Lane, who said that it is still early to talk about ending emergency bond purchases. At the same time, he was skeptical about the likelihood of curtailing QE this year.
Given the fact that the last meeting of the ECB was held quite recently, traders did not expect any "hawkish" notes from Lagarde. After all, she refuted suggestions during the final press conference that the Central Bank will begin to wind down the emergency asset purchase program due to the pandemic (PEPP) earlier than planned.
During yesterday's speech, Lagarde did not change her opinion on this issue, but her rhetoric was much more optimistic. She said that the outlook for the European economy is largely improving, and the recovery is gaining momentum and added that a sufficiently strong increase in consumer spending could lead to an even stronger and faster recovery. At the same time, she believes that the coronavirus mutations are on the other side of the scale. According to the head of the regulator, new COVID strains still pose a danger, including for the economy of the European region (in the context that the EU countries may again resort to tightening quarantine restrictions). Summarizing her speech, Christine Lagarde concluded that the support of the European Central Bank is still necessary, given the existing risks.
In other words, the position of the ECB President remained "dovish". As a result, the upward correction of the EUR/USD pair was limited: the bears canceled an upward impulse during the Asian session on Tuesday. It is worth noting that the instrument is under the background pressure of uncorrelation of plans for the normalization of monetary policy. If the Fed hypothetically allows for an early curtailment of QE and an increase in the interest rate in 2022 or in 2023 at a fairly aggressive pace, the European Central Bank does not dare to make such assumptions.
This fact is the main trump card of the EUR/USD bears. Several experts (in particular, Goldman Sachs and Deutsche Bank) believe that the European PEPP program, which should be completed in March next year, will be extended until the end of 2022, and the ECB will raise rates only in 2024. At the same time, the head of the Federal Reserve Bank of St. Louis, James Bullard, recently announced that federal funds rates may be raised at the end of next year. It can be recalled that based on the Fed's point forecast, 7 out of 18 regulator members predict a rate hike in 2022, while now, 11 out of 18 Fed members project at least two rate hikes by the end of 2023. Compared to such intentions, the ECB's position really looks strongly dovish.
Today, the attention of traders of the pair will also be focused on the rhetoric of representatives of the European regulator – members of the Executive Board of the Central Bank Philip Lane and Isabel Schnabel will speak in the afternoon. It can be assumed that they will put pressure on the Euro currency. Philip Lane has already voiced his "dovish" position and is unlikely to change it, while Schnabel just the week before said that Europe has passed a turning point, but still needs the support of the ECB. We believe that she will repeat this rhetoric. As for the US, secondary statistics will be published today – the Fed-Richmond manufacturing index and the volume of home sales in the secondary market.
It can be assumed that the EUR/USD pair will continue to be under the background pressure of the above-mentioned uncorrelation. Buyers of the pair may be helped by either a tightening of the ECB's position or a softening of the Fed's position (for example, if macroeconomic reports indicate a slowdown in the recovery process in the United States). In this context, tomorrow's speech of the Fed Chairman in Congress is of interest. Jerome Powell will address a House Subcommittee hearing with a report on emergency lending and asset repurchase programs in the context of the coronavirus pandemic. If it confirms the hawkish intentions of the US regulator, the US dollar will get another boost for its rally.
As for trading decisions, it is necessary to carefully monitor the behavior of the pair near the support level of 1.1850 (lower line of the Bollinger Bands on the daily chart and the upper border of the Kumo cloud on the weekly chart). Against the background of the dollar's strengthening, the EUR/USD bears could not break through this target, which led to the upward correction of the pair. Therefore, short positions can be considered only to the support level of 1.1850. If we consider the medium and long-term periods, then it is better to take a wait-and-see position. It is advisable to go into sales once the pair breaks through the target of 1.1850 and consolidates below. It is also very risky to catch corrective rebounds, as buyers do not currently have clear arguments for such price movements.
