The EUR/USD pair is updating new and new price lows. The price has been declining almost continuously for five consecutive trading days. Today is the sixth round, during which the bears of this pair have already tested the area of the 12th figure. During Wednesday's Asian session, the pair updated the annual low, falling to the level of 1.1264. The last time the price was in this price area was in early July 2020. After that, the pair was seen within the upward trend, moving away from the lows of last year.
Currently, the situation is mirrored. Sellers of EUR/USD broke through all price barriers on their way, taking advantage of the general strengthening of the US dollar and the characterlessness of the euro. A month ago, the global support level of 1.1000 seemed an unattainable value, but today, it is reachable. We only have less than three hundred points. This is despite the fact that the pair has fallen by the same 300 points literally in the last five trading days. The downward trend is in full swing. This fact suggests that traders will not stop there – it will only be a matter of time before the 1.12 mark is broken. And judging by the strength of the downward movement, the bears will need a little time to consolidate in this price area.
It is worth noting that the EUR/USD pair impulsively broke through the lower line of the Bollinger Bands indicator on almost all the higher timeframes (H4, D1, W1), ending up under this line. From a technical point of view, the key support level is the 1.1020 mark – this is the lower line of the Bollinger Bands already on the monthly chart. However, there are many intermediate price barriers on the way to this target, which can slow down the downward wave. But in general, this support level is the main target of EUR/USD bears in the long term. It should be noted here that the currency strategists from the Finnish Nordea Bank said at the beginning of autumn that the pair could end the current year in the area of the 10th mark, and then in the area of the 7-8th mark next year. It looked very unusual at the time of publication of this forecast since the pair had been hanging out in the range of 1.1600-1.1900 for several months, not daring to leave the occupied level. But now, the above assumptions look quite realistic.
In general, the market is already ready for the next year, assessing the chances of a Fed interest rate hike. The current events resemble the events of 7 years ago. We can consider here the monthly chart of 2014, when the pair fell almost continuously for almost all 12 months. Traders were waiting for the Fed's tightening of monetary policy amid the ECB's soft monetary policy. Naturally, the downward dynamics of the price was due not only to this, but these factors played a key role.
Now, let's go back to the beginning of this year. The soft rhetoric of the ECB representatives was to some extent offset by the "dovish" rhetoric of the Fed representatives. As a result, traders maintained the balance of power, keeping the pair within the above-mentioned price range. But then US inflation came into play, which significantly strengthened the position of dollar bulls. As already known, the October consumer price index has updated a 30-year record, significantly exceeding the forecast values. The core ICE index, which is the Fed's "favorite" inflation indicator, is also at a high level, spurring hawkish expectations.
In general, the divergence of the Fed and ECB rates is the main driver of the EUR/USD pair's decline. However, it is necessary to make a reservation that we are talking about the alleged divergence. But there are many more "hawks" among the members of the Federal Reserve, compared to the Board of Governors of the European Central Bank. Representatives of the hawkish wing of the Fed are publicly calling on their colleagues to take action next year. Suffice it to recall James Bullard, who said on Monday that the regulator needs to accelerate the curtailment of QE to 30 billion per month, raising the interest rate at the end of the first quarter of next year. Meanwhile, there are no such "daredevils" among the ECB members – in the vast majority of cases they voice rather mild comments on the prospects of monetary policy. Christine Lagarde solidifies the ECB's position, refuting talk that the European regulator may decide on any early action.
The market is living with hawkish expectations, provoked by comments from some Fed representatives and macroeconomic reports. US inflation, Nonfarm, retail sales data, industrial production – all these indicators were released in the "green zone", reflecting the recovery of the US economy. The risk of stagflation, which was talked about so much at the beginning of autumn, has decreased, while the widespread rise in prices is already negatively affecting the daily lives of Americans. This is proven by recent opinion polls.
Here, the phrase Jerome Powell said in Congress in September can be recalled. He said the US regulator "should consider raising the rate if it sees evidence that rising prices are forcing households and companies to wait for higher prices to take root, creating more sustained inflation." It is likely that this phrase will become the theme of the Fed's December meeting.
Therefore, we believe that the downward trend of EUR/USD is not yet over. Both the technique and the foundation suggest that the bears of the pair will attempt to consolidate within the level of 1.12 again, despite the current corrective pullback. The first downward is the level of 1.1264, which is the updated price low for the year.
