If Christine Lagarde stresses the differences in the US and euro-area economic growth and the monetary policy of the Fed and the ECB, the EURUSD bulls will be discouraged. Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
Since Monday, the EURUSD bulls have been afraid of the dovish tone of the ECB officials at the meeting on July 22. However, they are tired of fears and go ahead. The euro has soared amid an increase in the global risk appetite. Will the growth continue?
Over the past decade, the euro-area economy has faced persistently low inflation that does not meet the targets of the ECB. In other words, output and employment were lower than they needed to meet the European Central Bank’s criteria for price stability. As a result, Christine Lagarde inherited higher debt and lower inflation expectations. The ECB will spare no effort to support the inflation growth.
In this respect, the forecast of PGIM Fixed Income of an increase in the earlier quantitative easing program (APP) after the completion of PEPP from €20 billion to €80 billion per month does not look fantastic. It is about ECB’s additional asset purchases for €720 billion for the year until March 2023, which is equivalent to a third of the bonds purchased by the European Central Bank since 2014. Given the ECB’s forecast of 1.4% inflation in 2023, the regulator has to do much work to bring the indicator up to a target of 2%. And Christine Lagarde is willing to start right away.
Dynamics of eurozone inflation and ECB forecasts
Christine Lagarde should again speak about the difference in the US and euro-area economic growth at the press conference following the Governing Council’s meeting. According to Oxford Economics, the delta variant of COVID-19 will threaten the United States if it becomes uncontrollable, which is unlikely. Against the background of successful vaccinations, consumers savings, and the willingness of Americans to spend money, the United States is not going to introduce new restrictions. Unlike European countries. By highlighting the divergence in GDP growth, the ECB president will set the EURUSD bulls back.
The same goes for monetary policy. The current inflation and the ECB forecasts give no reasons to tighten monetary policy. The Fed’s officials, however, talk about tapering the QE and could raise the interest rates in 2022. In theory, this should support the Treasury yield growth, widening the gap between the US and the euro-area bond yields and pressing the euro down against the greenback. Nonetheless, the Treasury yields do not grow, which could result from investors’ concerns about a downturn in the global economy. Again, it is a reason to buy the dollar as a safe-haven asset.
Weekly EURUSD trading plan
The divergence in the GDP growth and monetary policies, as well as high demand for safe-havens, suggests selling the EURUSD on the rise, followed by the rebound from the resistance levels of 1.1825, 1.187, and 1.192. It will also be relevant to sell the euro if the price doesn’t consolidate above $1.177.
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.