Forex. EURUSD: Fed may be misleading the market

EUR/USD, currency, Forex. EURUSD: Fed may be misleading the market

FOREX Fundamental analysis for EURUSD on December 19, 2022

The European Central Bank has long taken a wait-and-see attitude and watched as other regulators tightened monetary policy.

Now that most central banks are looking at easing rates, the process is just beginning in the Eurozone.

However the Fed has also made it clear that it will continue to fight high prices, which was immediately reflected in the dynamics of the stock indices. In such conditions the chance of EUR/USD strengthening is very low.

High inflation was the main theme for the markets in 2022. But the fight against it is creating new problems. Indefinite increase of rates undermines consumer demand and threatens to reduce employment, which will lead to an economic recession. The Eurozone has long been poised for a recession while the United States has tried to avoid the drawdown. But, disappointing statistics in recent days have sent stock indices to real levels.

After the data on retail sales and decline in industrial production, investors were unpleasantly surprised by the US business activity indexes that showed the largest fall in December since 2009.

Markets reacted in typical fashion. The S&P 500 crashed, followed by a slew of risky assets via a correlation between currencies and indices. The hawkish rhetoric of the Fed completed the picture. Several members of the FOMC believe that the current effort to bring inflation down to 2% is insufficient, and more drastic action is needed to stabilize the decline.

The collapse of stock indices undermined the effectiveness of the ECB's actions to shore up the single currency. But the market realized that the Bank, in the words of Christine Lagarde, "has a long game ahead of it." The European regulator is expected to raise the rate to 3.7%.

I do not exclude the possibility that the Fed may change its stance in the very near future and announce the end of the rate hike cycle. But for now we keep selling EUR/USD and will turn over from supports 1.0535; 1.0500 and 1.0440.

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