08.12.202123:10 Forex Analysis & Reviews: EUR/USD. With an eye on the ECB: bears do not dare to storm down

The euro-dollar pair continues to trade on the border of 12 and 13 figures, demonstrating the "disarmament" of both bears and bulls. EUR/USD bears updated the one-and-a-half-week price low yesterday, dropping to the level of 1.1226. But they could not develop their success: the 11th figure turned out to be "too tough for them". The bulls seized the initiative as soon as the downward momentum began to fade. In general, during the first week of December, the pair slowly and gradually slid down, while demonstrating broad upward pullbacks. Traders cannot decide on the vector of price movement, so they do not play "for a long time", taking profits at the first signs of momentum fading. Each side has its own tasks: bulls need to settle within the 13th figure (namely, above the average line of the Bollinger Bands indicator on H4, which corresponds to 1.1330, while bears need to settle at the base of the 12th figure to declare their claims to the 11th figure. However, the prevailing fundamental background does not allow them to fulfill this uncomplicated "mission".

If we look at the weekly EUR/USD chart, we will see that the pair has been steadily declining from the end of October to mid-November, allowing itself only short breaks. Traders have changed the price level of 1.1500-1.1650 to the level of 1.1180-1.1380. If you look at the monthly timeframe, then the trend here becomes more distinct: the pair has been showing a downward trend since the beginning of June, dropping from 1.2254 to a low of 1.1186.

This 900-point decrease is due to the divergence of the positions of the European Central Bank and the Federal Reserve. All other fundamental factors, by and large, have played and are playing a supporting role. Now let's go back to the weekly EUR/USD chart. It can be noted that over the past two weeks, the pair has actually been marking time, despite the significant tightening of the rhetoric of Federal Reserve Chairman Jerome Powell, the strengthening of the "hawk wing" of the Fed and the record growth of US inflation. And the latest Nonfarm can be evaluated in different ways – for example, the unemployment rate in the United States fell to a 21-month low (4.2%) in November. Therefore, such indecision of EUR/USD bears looks abnormal. For several months, the pair has been declining on expectations of an early curtailment of QE and a subsequent rate hike. And so, as soon as Powell decided to implement the first part of the hawkish scenario, EUR/USD bears began to show amazing indecision, making only short-term downward "raids".

Such an anomaly is most easily explained by the "coronavirus factor". The new Omicron COVID strain in early December really scared many market participants, putting pressure on the US currency (which followed the yield of 10-year treasuries). However, this week the "Omicron factor" has noticeably weakened, against the background of optimistic comments by the chief infectious disease specialist of the United States and representatives of the World Health Organization.

What, then, is the reason for the indecision of the EUR/USD bears? In my opinion, the main "culprit" is the ECB. Some experts do not rule out the possibility that at the December meeting the ECB will follow the example of the Fed and tighten its rhetoric. Let me remind you that inflation in the eurozone has reached a record high, having been marked at 4.9%. The strongest CPI growth was recorded in all major economies of the European Union. In particular, in Germany, inflation rose to a 29-year high (6% year-on-year), in France, the indicator broke a 13-year record, rising to 3.4%.

It should be noted here that ECB President Christine Lagarde does not tire of repeating the thesis that the increase in inflation is temporary and caused by temporary factors. Until recently, her colleague Powell voiced similar rhetoric, but then he gave up, saying that "it's time to abandon the word "transitional" regarding inflation." At the same time, he announced the early curtailment of QE. It is expected that the pace of reduction of the incentive program will increase from the current $15 billion to $30 billion monthly.

Against the background of such an unexpected reversal, some analysts warned that the ECB may also tighten its rhetoric in the foreseeable future. Moreover, the first "alarm bells" in this context have already sounded. For example, the head of the Bank of Estonia and a member of the ECB Council, Madis Muller, said yesterday that the need to increase the volume of APP purchases after March (when the PEPP program ends) "cannot be called obvious." According to him, the growth of European inflation next year may be higher than the target level, and upward risks "prevail". It is noteworthy that a similar position was recently voiced by the head of the central bank of Austria, Robert Holzmann.

Such verbal signals alerted traders. There have been cautious speculations on the market that the ECB will announce at its December meeting that it will end the Emergency Asset Purchase Program (PEPP) in March, but refrain from announcing an increase in the traditional quantitative easing program (APP). It cannot be said that such a result of the December meeting will be hawkish - but the market interprets such a final unequivocally in favor of the European currency.

All this suggests that the EUR/USD pair in the medium term (until the end of next week) will be trading within a wide price range. On one side of the scales is the actual tightening of Powell's rhetoric, on the other side of the scales is the alleged tightening of the ECB's rhetoric. The "ceiling" of the corrective pullback is the level of 1.1400 - this is the Kijun-sen line on the D1 timeframe. If the upward momentum begins to fade in this price area, you can consider the option of short positions to the level of 1.1250 (the lower line of the Bollinger Bands on the H4 timeframe). Most likely, the pair will trade in this 150-point range before the announcement of the Fed and ECB verdicts.