Which party is euro to choose? Forecast as of 28.10.2021

2021-10-28 2021-10-28
Which party is euro to choose? Forecast as of 28.10.2021logo

October marked a split among the members of central banks. Some lawmakers adhere to the mantra about the temporary nature of inflation, others consider high prices to be a longer-term factor. Which party does the ECB belong to? How will this affect EURUSD? Let us discuss the Forex outlook and make up a trading plan.

Fundamental euro forecast for today

For the first time in a long time, foreign exchange rates depend on interest rates as central banks begin to signal monetary policy normalization. At the same time, the split in the central bankers’ opinions is well traced. Some officials ignore the acceleration of inflation; others express concerns about the permanent nature of high prices. The decision of the Bank of Canada to quit the QE has supported not only the Canadian dollar but also the New Zealand dollar and the pound. While lower forecasts of the Bank of Japan for inflation and GDP press down not only the yen but also the euro.

Instead of cutting QE purchases from CA $2 billion to CA $1 billion a week, the Bank of Canada has said that it no longer needs QE as the economy approaches a full recovery. Moreover, the overnight rate is likely to be raised earlier than expected. Hawkish and important is the BoC’s announcement that the main drivers of price increases, like energy and supply chain bottlenecks, now appear more resilient than earlier expected. The Bank of England and the Reserve Bank of New Zealand share a similar viewpoint, so the strengthening of the NZD and GBP following the Canadian dollar looks natural.

The opposite ideas are expressed by the ECB and the Bank of Japan. The latter lowered its inflation forecast for 2021 from 0.6% to 0%. It expects the inflation rate to reach only half of its 2% target in 2023, which suggests that the BoJ will maintain its ultra-easy monetary policy for years to come. Will the ECB follow its path? Or are the signals given by money markets reasonable?

The rise in the euro-area inflationary expectations is as fast as in the USA. The euro-area consumer prices break through13-year highs, giving investors a reason to expect the interest rate hike in late 2022. According to market expectations, the ECB rate could rise from -0.5% to 0% by the end of 2023.

Dynamics of inflationary expectations in euro area and USA

Source: Nordea Markets

A change in the investors’ expectations results in tightening financial conditions, leading to the ECB’s verbal interventions. However, investors ignored the claim of the ECB chief economist that markets misinterpret the central bank’s policy guidance. Will Christine Lagarde dissuade markets? This question turns a seemingly uninteresting ECB meeting into a very exciting one.

Weekly EURUSD trading plan

I suppose the ECB can discourage the sellers of the euro-area bonds and the euro buyers by lowering inflation forecasts for 2022-2023 or by declaring that it is not going to raise rates earlier than 2024. Otherwise, verbal interventions alone won’t set the EURUSD bulls back, as Lagarde’s dovish comments have been prices in the main currency pair. Therefore, one could consider buying the euro versus the US dollar on the breakout of the resistance 1.1625. If the price fails to break out the resistance or goes below the support at 1.1585, it will be relevant to sell the pair.

     

 

 

 

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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