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For a long time, the Fed has argued that it is ready to endure high inflation, likewise the ECB. However, it is one thing when consumer prices in the eurozone rise by 2%, and another thing when in the United States - by 5.4%. The intention of the Federal Reserve to act as required by classical economic theory broke the upward trend in EUR/USD, and the pair continues to fall.
At its July meeting, the ECB made it clear that it intends to normalize monetary policy ahead of time in order not to cut off the oxygen of the currency bloc economy rising from its knees. Christine Lagarde and her colleagues do not want to repeat the mistakes of their predecessors, in particular Jean-Claude Trichet, who raised the rates, which ultimately led to a recession. The new strategy of the European Central Bank assumes that we will not wait for monetary restriction, at least until 2024-2025. The emergency asset purchase program due to the pandemic will end in March 2022, but in return, the ECB is likely to increase the scale of the old QE by €20-40 billion per month.
This clearly "dovish" position of Frankfurt contrasts with Washington, which will begin to discuss the issue of tapering QE by $120 billion at a meeting on July 27-28. Some FOMC officials are ready to raise the federal funds rate as early as 2022, and the divergence in monetary policy serves the bears on EUR/USD faithfully. And it should be noted that, given such a wide differential of core inflation in the US and the eurozone, the euro against the dollar looks very overvalued.
Dynamics of EUR/USD and the differential of core inflation in the USA and the Eurozone
Of course, one can hardly talk about parity, but if the current divergence in the core CPI persists, we can expect the continuation of the peak of the main currency pair in the direction of 1.14-1.15. Moreover, divergence in monetary policy is not the only trump card of the bears on EUR/USD.
They have adopted faster economic growth in the United States compared to the currency bloc. The releases of GDP data for the second quarter, along with the FOMC meeting and inflation data, will be the key events of the last week of July. According to Bloomberg experts, economic growth in the United States accelerated from 6.4% to 8% in April-June. JP Morgan believes that it will be even better in the third quarter (8.25%). Thanks to effective vaccination, the American economy is more resistant to new COVID-19 strains, it does not need additional restrictions as in Europe.
What can mark the euro? Is that a lower rate of decline in the vaccination than in the US, but this factor should play out later. Probably as early as 2022.
Dynamics of vaccination rates in the USA, UK, and the EU
Thus, from a fundamental point of view, there is no reason to doubt the strength of the downward trend for the main currency pair.
Technically, a pullback from the moving average near 1.1825 allowed us to form a short position on EUR/USD. It is unlikely that a target of 88.6% on the Shark pattern will stop the bears. Most likely, before going to a correction, the pair will touch the level of 1.165 (113%). We continue to sell it.
EUR/USD, Daily chart
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