EURUSD Downside Still in Play as the Dollar Leads in the FX Space

The most popular currency pair in the world benefited from the media’s attention as of late, mainly because the bullish trend established in 2020 has reversed and even threatens to accelerate further, on the back of a strengthening US Dollar, rising inflation all around the world, and economic uncertainty.

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EURUSD reached levels not seen since June 2020 and despite a short-term bounce, the bigger picture is still favoring bears. This performance defied all forecasters that were expecting persistent dollar weakness, and thus a continuation in the EURUSD bull trend. Sentiment can shift dramatically, in line with the fundamentals, which now deserve a closer look.

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Growing monetary policy divergence?

If the European Central Bank does not show any sign that it plans to change its inflation and monetary stance, things are going to be completely different in the United States. Fed’s Governor Jerome Powell recently stated that the Central Bank will discuss speeding up bond-buying taper at the December meeting.

The Bank already announced it plans to start reducing asset purchasing during the last meeting and given persistently high inflation, strong economic activity, and a tight labor market, investors are now expecting the Fed to be first in line when it comes to shifting away from unconventional monetary policy.

Better economic recovery in the US

As the economic recovery in the Eurozone is uneven, forex participants view the USD as a safe placement. Pre-pandemic GDP levels are expected to be reached in 2022 across the Old Continent, while in the US, that has already happened.

One of the main flaws of the EU is that although monetary policy is set by the ECB, things are fragmented in terms of fiscal policy. Each country has a unique approach, which leads to less economic flexibility and a sluggish economic recovery.

At the same time, debt-to-GDP levels are worryingly high in countries like Spain, Portugal, France, Italy, and Greece, and since governments were tapping into massive fiscal spending during the pandemic, solvency risks could build up once that effect wanes.

EURUSD technical analysis

When looking at the technical picture, EURUSD is in an established bear trend. The price found temporary support near 1.12, where a June 2020 swing point is also located. Since the price action is parabolic, the move has the potential to further extend in the near term.

Most major banks shifted their expectations and now see the currency pairs reaching and even breaking below the psychological area at 1.10.

Even though a stronger USD acts as global deflationary pressure, balancing the current high inflation, an exaggerated move could start to diminish economic prospects, while also hurting corporate profits in the US.

Final words

Both the fundamental and technical pictures for EURUSD are pointing toward further weakness in the near term. The pandemic might be close to an end, but the economic consequences can get be more pronounced in Europe, which favors a flight to safe-havens like the Dollar.

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