The current winning streak for the EURUSD pair is the longest since 2004, causing concern among ECB officials. They are resorting to verbal interventions. However, the experience of the Bank of Japan suggests that this approach does not guarantee the desired results. Let’s discuss this topic and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- The ECB wants the euro to stand at 1.17, while a valuation of 1.20 is not regarded favorably.
- The euro rally is tightening financial conditions in the eurozone.
- The Fed prefers a flexible approach to monetary policy.
- Long trades on the EURUSD pair remain relevant with targets at 1.2 and 1.22.
Monthly Euro Fundamental Forecast
A robust economy can effectively contend with a strong currency. Germany and the Deutsche Mark demonstrated this during their period of dominance. However, if the economy grows by less than 1% per year, the central bank may face challenges in strengthening its currency. This could result in a return to deflation and a decline in exports. ECB Vice President Luis de Guindos’s remarks that 1.17 for the EURUSD pair is normal, but 1.2 is not favorable, dampened the enthusiasm of euro fans.
The European Central Bank can celebrate its success in achieving its 2% inflation target. During the Sintra Forum in Portugal, Christine Lagarde declined to state that the ECB’s mission had been completed, but confidently declared that the objective had been accomplished. What are the next steps? Will the euro rally weaken the eurozone economy? Will it force the ECB to return to a cycle of monetary expansion?
Eurozone Inflation Rate
Source: Bloomberg.
As Japan’s experience demonstrates, central banks are primarily concerned about excessive currency fluctuations. The EURUSD pair recently achieved a record-breaking winning streak, marking the longest uninterrupted rise since 2004. This feat is particularly noteworthy as it occurred only twice in the history of the euro. A sharp rise will certainly lead to tighter financial conditions and pose a significant challenge for exports and the eurozone economy.
The Bank of Japan addressed the issue of excessive fluctuations in the yen through verbal and currency interventions. However, the ECB’s hands are tied in the context of ongoing trade negotiations between the US and the EU. The US administration, which is prioritizing the weakening of the US dollar, will certainly be dissatisfied with the European Central Bank’s attempts to slow down the EURUSD pair.
ECB Forecast for Euro Rate
Source: Bloomberg.
The policies of Donald Trump have implications for both the ECB and the Fed. According to Jerome Powell, if it were not for tariffs, the Fed would have already lowered rates. However, the robust US economy enables the US regulator to adopt a wait-and-see approach. Meanwhile, the Fed chief has made it clear that the FOMC is maintaining flexibility, and the decision to resume the cycle of monetary expansion can be made at any time, depending on the data. During his recent testimony before Congress, Jerome Powell stated that a reduction in borrowing costs should not be anticipated until September.
If tariffs are hindering the Fed’s actions, then lower rates could potentially lead to a monetary easing. This is precisely what the derivatives market is counting on. According to its forecasts, the federal funds rate will fall by 125 basis points over the next nine FOMC meetings. In contrast, the ECB will reduce its deposit rate by a mere 25 basis points over the same period.
Monthly EURUSD Trading Plan
A divergence in monetary policy creates tailwinds for the EURUSD pair. The Bank of Japan’s experience suggests that verbal or currency interventions by the ECB will likely require a change in monetary policy conditions, but it is premature to expect this now. In this connection, long positions on the euro can be opened on pullbacks with targets at 1.2 and 1.22.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
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 LiteFinance broker. 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 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
Feed from Litefinance.com