Weekly EUR/USD Outlook: Weak Monetary Authorities Should Favor The USD

After three weeks of oscillating around 1.1300, the EUR/USD pair has slight gains going into the weekend but no clear direction.

Holiday blues will hit hard due to instability in the following two weeks, and decreased volumes may lead to some odd price movement before the year’s conclusion.

No Price Impact From Tapering

The US Federal Reserve and the European Central Bank presented new inflation and growth predictions. Following the findings, both markets adopted tapering-related actions that lacked direction.

The Fed boosted the monthly reduction in bond purchases from $15 billion to $30 billion starting in January 2022. There will be no monthly Treasury and MBS purchases, which implies rate rises will be faster. This means three rate rises in 2022 and another three in 2023.

Inflation predictions for 2021 and 2022 have been increased to 5.6% and 2.6%, respectively. The GDP is now anticipated to increase by 4% in 2022, up from 3.8% in September, and by 2.2% in 2023, flat from 2.5% in September.

However, the ECB affirmed that the Pandemic Emergency Purchase Program would cease in March 2022. After completing the monthly €60 billion bond purchase under PEPP, the Government Council agreed to extend its Assets Purchase Program from €40 billion to €30 billion per month in 2022.

The central bank now expects inflation to rise from 2.6% to 3.2% next year. It claimed price growth would then slow to 1.8% in 2023 and remain there in 2024 while cutting the growth projection for 2022 to 4.2% from 4.6%.

The Bank of England announced a 15 basis point rise, joining the tapering train. The introductory rate was then raised to 0.25% from 0.1%.

Inflation Must Be Tamed

So far, so good. Would tapering help? Probably not, but it’s a start. A rise of 10 or 15 bps every other session should be the next, although it might take years for levels to be high enough to affect inflation.

Monetary authorities are aware but unaware. They can only hope that impediments will disappear. On the other hand, the Omicron variation leads to specific punitive laws that may further stifle economic development and exacerbate supply chain concerns, contributing to rising prices.

The latest macroeconomic statistics reveal high inflation and poor economic growth. In November, the US Producer Price Index climbed 9.6% YoY, but Retail Sales gained only 0.3%. In Europe, the IFO Business Climate fell to 94.7 in December, whereas the EU Consumer Price Index rose 2.6% YoY.

The US will release the official Q3 GDP figure and November Durable Goods Orders, whereas the EU will release December Consumer Confidence.

EUR/USD Technical Forecast

EUR/USD CHART Source: Tradingview.com

With gains falling short of the following Fibonacci resistance line at 1.1380, the EUR/USD pair is presently trading at the 23.6% retracement of its November slump.

The technical view remains unchanged, with long-term risk in the negative. EUR/USD stays far below all moving averages on the weekly chart, with the 20 SMA breaking below the 100 SMA, indicating widespread selling. The RSI is at 30, and momentum is barely rebounding from a new multi-week low.

Weekly, EUR/USD is balanced, trading above a flat 20 SMA but below bearish longer ones. The time frame’s chart patterns are relatively weak and hang around their midlines.

Only a break above 1.1380 would favor a return to a long-term static resistance level around 1.1470. Support levels are 1.1250 and 1.1185, the latter being the year’s low. A breach underneath it should allow a test of 1.1000.

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