The euro/dollar pair is trying to cement its upward movement. However, it is quite hard given that the ECB and the Fed stick to different approaches to monetary policy.
On Wednesday, the Fed is widely expected to start a cycle of interest rate hikes. However, analysts pay attention to the fact that in case of a rate increase, the EUR/USD pair may face bearish pressure. The main reason is the different stance of the Fed to monetary policy compared to the ECB. It means that the key rate is in the US will be significantly higher than in the ECB. The US central bank is determined to combat inflation, while the ECB is hesitant to tighten monetary policy. As a result, the euro looks weaker against the US dollar.
According to analysts, the situation in the energy market and the revival of the eurozone economy boost the euro against the greenback. In the fourth quarter of 2021, the economy expanded by 0.3% in quarterly terms. Apart from that, there was a significant drop in the cost of commodities, in particular oil and gas. These factors are facilitating the growth of the euro.
The global oil market has sagged significantly in recent days amid geopolitical tensions. Previously, the main risk to the global oil market was disruptions in energy supplies from Russia. However, it is not relevant now as the EU has phased out Russian oil, gas, and coal. The ban on Russian fossil fuels by Western countries has not changed the total volume of oil supply in the global market.
The euro took advantage of the situation, resuming an upward movement. On March 15, the EUR/USD pair rose to 1.1020 but then declined below the level of 1.1000. Analysts note that the pair is hesitant to pick up a trajectory. On March 16, the pair was flirting with 1.0973, slightly retreating from previous levels.
Traders are anticipating the FOMC meeting as the regulator will finally announce its key rate decision and forecasts for leading macroeconomic indicators. The US dollar is trading near a five-year high against the yen ahead of the Fed meeting. The euro/dollar pair sank slightly. However, it is not ready to enter the downward channel. Investors are betting on a hawkish stance, namely a rate increase. They are sure that the regulator will have to tighten monetary policy amid the Russia-Ukraine conflict and an uptick in new coronavirus cases in China.
Some analysts point out that the Fed has not prepared properly before entering the monetary policy tightening cycle. They fear that the regulator will have to deal with some unpleasant surprises. At the same time, there is no choice, especially after discouraging annual inflation expectations data. The figure jumped to 6% from the February reading of 5.8%. Apart from that, there was a decrease in US Treasuries yields.
Now, economists are extremely worried about a surge in new coronavirus cases in China, the world's largest oil importer. It increases the risk of a drop in global demand for commodities. Therefore, analysts have lowered the outlook for global economic growth to almost zero.
However, the turmoil in the oil gold market turned out to be bullish for the EUR/USD pair. The euro/dollar has been growing steadily for the two trading sessions in a row. Analysts believe that such a rise is associated with geopolitical uncertainty and risk aversion. Thus, the US dollar is now overbought.
