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The European Central Bank (ECB) may preempt the Federal Reserve and be the first to loosen monetary policy, but what is happening in the USA cannot fail to influence the eurozone. All verdicts of the Fed are immediately reflected in financial markets, currency exchange rates, interest rates, financing conditions, foreign trade, and other indicators. They are like gravity, affecting the entire global economy. Therefore, Fed Chair Jerome Powell's neutral rhetoric boosted EUR/USD quotes even amid eurozone economic weakness and rumors of a rate cut on deposits as early as April.
The futures market anticipates both the Fed and the ECB to start easing monetary policy in June. However, while Frankfurt expects four steps toward monetary expansion, Washington anticipates only two to three. Different scales of monetary expansion provide grounds to sell EUR/USD. Moreover, on the horizon of one to two years, the European Central Bank expects sharp increases in borrowing costs by 113 and 163 basis points, compared to 88 and 113 basis points from the Fed.
Market forecasts for central bank interest rates
The crux of the matter lies in the stronger U.S. economy compared to the currency bloc. The most recent business activity statistics provide further evidence of the divergence in economic growth. While the American PMI in the manufacturing sector surpassed the 50 mark for the first time in 16 months, its European counterpart deteriorated. Since the onset of the pandemic, the gap in GDP growth rates has been consistently widening, thus elucidating the downward trajectory of EUR/USD.
Nevertheless, the main currency pair has been confidently rising for three consecutive days, which may be due to both Powell's speech and disappointing statistics on U.S. business activity in the service sector, as well as the closure of speculative long positions on the U.S. dollar ahead of the release of the important non-farm payroll report.
U.S. and Eurozone Economic Dynamics
The Fed chair continues to assert that inflation is confidently moving towards 2%, although its path will not be direct. It seems bumpy, and CPI and PCE data for January-February confirm this. At the same time, the strength of the U.S. economy will not prevent the central bank from cutting rates. Such rhetoric has been a balm for the wounds of stock indices, allowing them to partially recover positions after two days of decline.
As a result, confidence was felt in the euro in the fight against such a safe-haven currency as the U.S. dollar. However, different rates of economic growth and monetary expansion are much more important drivers of changes in EUR/USD quotes than the words of Jerome Powell. The Fed's policy depends on data, and so far, this data favors the bears on the main currency pair.
Technically, on the daily chart, EUR/USD is undergoing a correction to the downward trend. The euro managed to return to the fair value range and stormed the pivot level at $1.0845. A return below it or a bounce from resistances at $1.0885 and $1.0905 should be used for selling.
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