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EUR/USD: 1.05 becomes a real target

EUR/USD, currency, EUR/USD: 1.05 becomes a real target

FOREX Fundamental analysis for EUR/USD

The surprise rate cut from the Swiss National Bank and the decision of representatives of the hawk wing of the Bank of England not to vote for tightening monetary policy set an example for other Central Banks. And now the head of the Bundesbank, Joachim Nagel, declares the ECB's readiness to reduce the cost of borrowing. Even if the Fed does not follow their example, this is enough for the EURUSD bears. The pair worked out the sellers' target mark at 1.08.

The recent cycle of tightening financial conditions has been unique. Central banks raised rates very quickly, which made it possible to talk about the most aggressive monetary restriction in decades. However, the mitigation phase will take place in a different way. Don't wait for fireworks. Regulators intend to move slowly, carefully analyzing the input data. At the same time, some central banks simply need to increase the speed of monetary expansion.

It is important to realize that at the moment, lowering rates is not an incentive for the economy, but a real antidepressant. When the ECB set the cost of borrowing at 4% in September, inflation in the Eurozone was 4.3%. That is, the real rates were about zero. Now, as the consumer price index has fallen to 2.6%, they have risen to 1.4%. The same indicator for Britain is 1.85%. This creates additional difficulties for European economies that are already quite weak.

The United States, by contrast, boasts the strength of economic growth. Large fiscal incentives during the pandemic, the growth of excess savings, the influx of migrants, the development of artificial intelligence technologies and accelerated productivity growth allow GDP to grow by 3% per year and above. Such an economy can withstand high real rates. In addition, its rapid growth, rather than a soft landing, increases inflation, forcing the Fed to think three times before adjusting monetary policy.

Bloomberg predicts an acceleration in the personal consumption index, which the Fed uses to analyze inflation, from 0.3% to 0.4% (mom). The three-month indicator may record the largest increase since May, and the six-month indicator may record a significant acceleration. Would the Fed really risk turning to monetary antidepressants in such circumstances?

Due to the strength of the American economy, the Fed may not be in a hurry to adjust monetary policy. But what is allowed to Jupiter is not allowed to the bull. The ECB does not have such an opportunity. It is possible that the federal funds rate will remain above 5% by the end of 2024, and the deposit rate will decrease by 75 basis points. If this happens, the yield difference between American and German bonds will increase further, and the EURUSD will fall below 1.05.

Thus, forex currency trading is changing the minds of investors. They are no longer so much interested in the time of the beginning of monetary expansion as in its speed. It is likely that the European Central Bank will have a much higher rate than the Fed. This provides a basis for further sale of EURUSD. The first target of 1.08 has been reached, we are going for the second one.

EUR/USD Technical analysis

At the end of the week, EUR/USD broke through the key support of the short-term upward trend in the range of 1.0855 - 1.0842. Now we can say that the trend direction has changed to a downward one. Starting on Monday, we begin to look for entry points to sales on an upward correction of the asset. Favorable prices for "bears" are located in the resistance area 1.0894 - 1.0885. The nearest target for sellers is the minimum mark of today. If the pair is fixed below the extreme, then the next target will be the Target zone in the range of 1.0729 - 1.0704.

The new trend boundary passes through 1.0940 - 1.0927. If EUR/USD rises to this zone, then we will also form short positions here.

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Jul 11, 2024 Read
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