EUR/USD Weekly Forecast: Unimpressive central banks should end up benefiting the USD

• The ECB and the US Federal Reserve announced tapering measures to tame inflation.
• Macroeconomic data hint at a steeper slowdown in economic progress in Q4.
• EUR/USD consolidative phase continues, although the risk is skewed to the downside.

The EUR/USD pair has spent a fourth consecutive week seesawing around the 1.1300 level, posting modest gains heading into the weekend, but without definitions on what’s next. At this time of the year, it is worth noting that holiday doldrums will hit volatility hard in the next two weeks, and reduced volumes may result in some weird price action by year-end.

Tapering had no impact on price action

Over the past week the US Federal Reserve and the European Central Bank announced their monetary policy decisions and offered fresh forecasts on inflation and growth. Markets were on hold ahead of the findings, and both central banks took tapering-related measures that fell short of triggering directional movements.

The Fed increased the reduction in bond-buying on a monthly basis to $30 billion, from $15 billion as announced in November, starting January 2022. That means the central bank will stop buying $20 billion Treasuries and $10 billion Mortgage-Backed Securities per month, and also means sooner rate hikes. The Fed’s dot-plot now implies three rate hikes in 2022 and three more in 2023.

The inflation forecasts have been raised to 5.6% for 2021 and 2.6% for 2022, up from 4.2% and 2.2% previously. The Gross Domestic Product is now projected at 4% in 2022, up from the previous median forecast of 3.8%, while the economy is estimated to grow 2.2% in 2023, down from the 2.5% in September.

On the other hand, the ECB confirmed it will end the Pandemic Emergency Purchase Program on March 2022 as previously anticipated. The Government Council also decided to expand its Assets Purchase Program to €40 billion per month in the second quarter of 2022 and to €30 billion in the third quarter of the year, to partially compensate the end of the monthly €60 billion bond-buying through PEPP.   

The central bank now foresees inflation increasing from 2.6% this year to 3.2%  the next one. But it said price growth would then fall to 1.8% in 2023 and stay at that level in 2024 while lowering growth forecast in 2022, to 4.2% from 4.6% previously.

Other major central banks unveiled their monetary policy decisions too, with the Bank of England joining the tapering train by announcing a rate hike of 15 bps. lifting, as a result, the main rate to 0.25% from a record low of 0.1%.

Long way ahead to tame inflation

The battle against inflation has just begun. Will tapering do something about it? Probably not, but it is the first step towards taming price pressures. Rising rates should be the next one, but at a pace of 10 or 15 bps every other meeting, it could take years for rates to be strong enough to have a significant impact on inflation.

Central bankers are aware of this but would not recognise it. At this point, they can only hope bottlenecks will somehow resolve themselves. The downside on this is the latest wave of covid, as the Omicron variant is leading to some restrictive measures that may further slow economic progress and aggravate supply chain issues, partially responsible for skyrocketing inflation.

Macroeconomic data released these days confirmed the scenario of overheating inflation and slow economic progress. The US Producer Price Index jumped to 9.6% YoY in November, while Retail Sales in the same month rose a modest 0.3%. In Europe, the German IFO Business Climate contracted to 94.7 in December, while the EU Consumer Price Index was confirmed at 2.6% YoY in November.

The upcoming week will be a light one in terms of data, as the US will publish the final reading of its Q3 Gross Domestic Product and November Durable Goods Orders, while the EU will unveil December Consumer Confidence.

EUR/USD technical outlook

The EUR/USD pair currently trades in the 1.1320 area, a few pips above the 23.6% retracement of its November decline, while advances fell short of testing the next Fibonacci resistance level at 1.1380.

The technical outlook remains the same, with risks skewed to the downside in the long term. The weekly chart shows that EUR/USD remains well below all of its moving averages, and with the 20 SMA crossing below the 100 SMA, a sign of prevalent selling interest. At the same time, technical indicators hold within negative levels, albeit close to oversold, with the RSI consolidating at around 30 and the Momentum barely recovering from a fresh multi-week low.

On the daily chart, EUR/USD is neutral, developing above a flat 20 SMA although below firmly bearish longer MAs. Technical indicators in the mentioned time frame hover around their midlines without clear directional strength.

As it has been happening since mid-November, only a break above 1.1380 could favour a recovery towards a long term static resistance area around 1.1470. On the other hand, support levels come at 1.1250 and 1.1185 – the latter the year low. A break below it should open the door for a test of the 1.1000 figure. 

EUR/USD sentiment poll

The FXStreet Forecast Poll shows that most market participants see EUR/USD declining next week towards sub-1.1300. However, bulls are set to take back control afterwards, with the pair seen on average at around 1.1360. The number of bears increases in the quarterly view, although not bulls, neither shows more than 50% of the polled experts as bearish.

The Overview chart shows that the market is quite bearish, as the monthly and quarterly moving averages head firmly lower, with lower lows at sight in the longer-term perspective. The weekly moving average turned neutral, losing its previous bullish strength.