23.11.202110:00 Forex Analysis & Reviews: EUR/USD. COVID-19 wave in Europe, ECB's dovish rhetoric, and Powell's new term

For the last two weeks, German coronavirus prevalence rates have been hitting records almost daily. According to the calculations of the Robert Koch Institute, at least 500 thousand residents of Germany are currently infected. This is the maximum value for the entire period of the pandemic. In the last day alone, more than 30 thousand new infections were detected in the country – this is 7 thousand more than on the same day a week earlier. On the wave of such trends, some regions of the country have increased quarantine restrictions, but these measures have not been able to correct the situation even within these regions. "We need a new nationwide lockdown," German Health Minister Jens Spahn recently made such an appeal. Against the background of a relatively low percentage of vaccinated in the country (67%, including revaccinated), such a scenario looks inevitable. Experts cite Spain as an example, where the percentage of vaccinated is much higher (more than 80%). The fourth COVID wave was avoided there.

The prospects of introducing a new nationwide lockdown in Germany are putting significant pressure on the euro. For example, cinemas, restaurants, and bars have already stopped working in Bavaria. Traditional Christmas fairs and markets have closed. In general, several experts said that the Germans cannot avoid a complete lockdown – it's a matter of time. And judging by the behavior of the single currency, traders are playing ahead of the curve, playing this fundamental factor.

The European Central Bank is also putting additional pressure on the euro. Next week will be the last meeting of the regulator this year. Before this event, ECB representatives are voicing "dovish" rhetoric, excluding the option of making early decisions both regarding QE and the fate of the interest rate. Yesterday, the head of the Central Bank of France and the head of the Central Bank of the Netherlands voiced their position. They said in unison that the current increase in inflation in the eurozone is temporary, so the regulator has no reason to revise its policy in the field of interest rates. Moreover, Villeroy additionally noted that the Central Bank probably will have to increase the volume of asset purchases under the APP program after the end of the monetary policy program. It is worth noting that rumors about this have been going around for a long time – the only question is how much this volume will be increased.

In other words, the fundamental background for the euro is not developing in the best way. The trade and political conflict between London and Brussels can also be added to the above factors. The UK continues to threaten to suspend the operation of the Northern Ireland Protocol, which actually avoids the restoration of the state border on the island of Ireland. The European Union, in turn, threatens the European Court of Justice and sanctions. By and large, the situation has reached an impasse, many weeks of negotiations have led to nothing, so the prospects for the development of a trade war between Britain and the EU look very real.

Meanwhile, the US currency continues to strengthen its position amid increasing hawkish expectations about the Fed's further actions. Yesterday, the currency strategists of the conglomerate Goldman Sachs confirmed their forecast, according to which the Federal Reserve will raise the interest rate twice – in July and at one of the last meetings of 2022. This idea is being lobbied by Fed representative James Bullard, who will have the right to vote in the Committee next year. In general, many Fed members have recently tightened their rhetoric, calling, in particular, to accelerate the pace of curtailing QE.

In light of recent events, it will be interesting to observe the "transformation" of Jerome Powell's position. The US President Joe Biden still nominated him for the post of head of the Federal Reserve System for a second four-year term. Lael Brainard, who was considered as the second of the leading candidates for the post of Fed chairman, will become deputy chairman. This news was calmly received by the market, as Powell remained the favorite of the "election race", although his chances were not considered as 100 percent. However, in the context of recent events, the personnel issue does not look like a determining factor. If inflation continues to show similar growth dynamics, the Fed will have to stop the situation by tightening the parameters of monetary policy - under Powell's control or without him. Let me remind you that Congress has yet to approve his candidacy, while many Democrats are skeptical about the topic, to put it mildly.

Therefore, the overall fundamental picture for the EUR/USD pair indicates the priority of short positions. It is advisable to use any corrective pullbacks to enter sales. The first and so far the main target is the 1.1200 mark, which corresponds to the lower line of the Bollinger Bands indicator on the daily chart.