15.01.202112:32 Forex Analysis & Reviews: EUR/USD dips below 1.21 mark. Relies on ECB and Fed's decision on monetary policy

The US dollar started 2021 on a positive note. The growth in Treasury yields and expectations of the acceleration of the US economy under the influence of large-scale stimulus from Joe Biden allowed the bears on EUR/USD to lower quotes to the bottom of the 21st figure. Judging by the S&P 500 rally, the divergence looks surprising, because the US stock index is an indicator of global risk appetite, and its growth, as a rule, leads to the sale of safe-haven assets. The market even began to circulate rumors that the dollar will change and will strengthen in 2021 in response to the positive global GDP.

In my opinion, the main driver of the EUR/USD peak in the first half of January was the "hawkish" comments of the Fed's plenipotentiaries, who did not hesitate to talk about the bright future of the US economy and QE by $120 billion a month. If the Fed begins to tighten monetary policy, and the ECB continues to soften it, the divergence will play into the hands of the bears on the main currency pair.

Indeed, the opinion of individual officials is not the opinion of the entire Central Bank. However, the most respected FOMC members, Jerome Powell and Richard Clarida believe that it is too early to talk about a reduction in asset purchases. The head of the Fed said that the most important mistake after the 2007-2009 crisis was the excessively rapid normalization of monetary policy. In 2013, Ben Bernanke's announcement of the end of QE provoked hysteria in the financial markets, which cost the global economy dearly.

Most likely, the Fed will continue to sit idly by for a very long time, and there may be problems with the expansion of the scale of monetary stimulus from the ECB. Yes, the eurozone economy is languishing with deflation and is likely to face a double recession, but inflation expectations have risen to their highest levels in almost a year, and the volume of monthly asset purchases in QE is declining.

Dynamics of ECB asset purchases

According to the minutes of the December meeting of the ECB, members of the Governing Council believe that the program for the emergency purchase of bonds may not be used in full. This testifies to the gaining strength of the "hawks", which was held back under Mario Draghi, and was encouraged under Christine Lagarde.

I do not think that the European Central Bank should be expected to ease monetary policy in 2021. It is likely to stick to the same strategy of passive contemplation, and that of the Fed. This circumstance makes it necessary to focus on the speed of economic growth when predicting the future dynamics of EUR/USD. If vaccination is successful, it will be higher in the eurozone in the second quarter than in the US, due to the rapid exit from a tougher lockdown. As a result, the main currency pair will be able to continue the rally in the direction of 1.25-1.27.

Technically, on the daily chart of EUR/USD, there is a "Surge and Reversal with Acceleration" pattern. To change the trend, bears need to lower the pair's quotes below 1.19, which seems to be a difficult task. I recommend using the rebound from the support at 1.208 and 1.204, as well as breakouts of resistances at 1.218 and 1.221 to form longs.

EUR/USD, daily chart