The EURUSD pair is under intense pressure as investors price in a widening divergence between the Federal Reserve and the European Central Bank (ECB). The pair declined to a low of 1.1342, which was slightly below last week’s high of 1.1386.
Divergence between the Fed and ECB
Economists believe that the Fed and the ECB will have a divergent path in 2021 as the world economy emerges from the pandemic.
In December, the Fed decided to double the size of its asset tapering to $30 billion. As such, if this pace continues, there is a likelihood that the bank will end its asset purchases program in the March meeting.
The bank’s dot plot also showed that the bank intends to implement three interest rate hikes in 2022, which will likely push rates to about 1%.
In his statement, Jerome Powell changed his view that the current inflation phase was transitory. He also hinted that the current Omicron wave will lead to more supply-chain disruptions, which will lead to higher inflation.
Meanwhile, the ECB has been a bit cautious about its policy. While the bank started its quantitative easing policies, it hinted that rates will remain low for a while.
In a report published on Monday by the Financial Times, most analysts believe that the bank will continue with its asset purchases in 2022. Only a quarter of those polled said that they see the bank ending the 1.85 trillion asset purchases this year.
Economists who believe that the asset purchases phase will continue cited the uneven recovery of the Eurozone economy. They also cited the supply-chain disruptions caused by the Covid-19 pandemic.
Also, analysts cite the fact that the ECB came under heavy criticism when it tightened too fast after the previous economic crisis. Another reason why the ECB could delay its tightening process is the upcoming election in France.
Economic data to watch this week
Looking ahead, the EURUSD will be in the spotlight this week as investors focus on key economic numbers from Europe and the United States. On Tuesday, the US will publish the latest manufacturing PMI numbers, which will show the early impacts of the Omicron variant.
On Wednesday, the Federal Reserve will furnish investors with more details about its monetary policy. It will publish its minutes of the meeting held three weeks ago. These minutes will show the thinking of the bank and what top officials said.
On Friday, the European Union will publish the latest preliminary inflation data for December. Economists expect the data to show that inflation fell from 4.9% in November to 4.7% in December. That decline will hint that inflation has started leveling off.
The most important numbers will be the latest non-farm payrolls (NFP) data. Economists expect the data to show that the non-farm payrolls rose from 210k in November to 400k in December. They also see the unemployment rate falling to 4.1% and the average hourly earnings falling to 4.1%.
The four-hour chart shows that the EURUSD pair declined to a low of 1.1345 on Monday as concerns of the Omicron variant rose. It managed to move below the key support at 1.1355, where it struggled moving above last week. It is slightly above the 25-day and 50-day moving averages.
Therefore, the pair will likely resume the bullish trend this week after doing the break and retest pattern. If this happens, the next key level to watch will be at the 50% Fibonacci retracement level at 1.1440.