The EURUSD has been under intense pressure lately and is hovering near its lowest level since July last year. It has crashed by more than 8% this year. Similarly, the euro is trading at its lowest point in 21 months against the British pound. The EURCHF has also fallen to the lowest level since May 2020.
The divergence between ECB and Fed
The main reason why the EURUSD pair is falling is that analysts have started to predict a divergence between the Federal Reserve and the European Central Bank (ECB).
In the past few weeks, the US has published strong economic numbers that have pushed investors to start pricing in a more aggressive Fed.
As a recap, data by the Bureau of Labor Statistics (BLS) showed that the US added more than 543k jobs in October. This was a relatively strong figure that will likely be revised higher in the next report. The unemployment rate dropped while wages continued doing well.
At the same time, the US is seeing a situation that has been termed as The Great Resignation. In October, millions of people resigned from their jobs. Some resigned because they found better opportunities elsewhere while others quit to start their businesses.
The US also published strong inflation and retail sales data. Inflation surged to the highest level in more than 30 years as energy prices rose. Retail sales also jumped sharply in October, signalling that people are willing to pay higher prices for items.
Therefore, analysts believe that the Federal Reserve will start embracing a tighter monetary policy in the coming months. In its recent decision, the bank decided to start tapering by reducing asset purchases by about $15 billion. Therefore, in the coming months, the bank will likely increase the size of the reductions.
ECB to remain dovish
While investors expect the Fed to remain hawkish, there is a sense in which the ECB will be a bit cautious. There are several reasons why this will happen.
First, some key Eurozone countries are seeing a third wave of Covid. This week, Germany’s Angela Merkel warned that her country was struggling with a new wave. As a result, the government announced some restrictions, which will affect the Christmas season.
Germany is not alone. In the past few weeks, other European countries like Netherlands and Austria have all announced new plans to restrict movements. Therefore, there is a likelihood that the bloc’s economic recovery will be weaker than expected.
At the same time, the EURUSD has crashed because of energy challenges. Europe is seeing a spike in gas prices as Russia struggles to meet the bloc’s demand. Germany worsened the situation by restricting the politically-charged Nord Strom 2 project. This means that Russia could retaliate by lowering supplies.
Also, the bloc’ is struggling with the UK. In the past few weeks, the UK has threatened to invoke Article 13 if the region does not give in to its demand about the Northern Ireland treaty.
The daily chart shows that the EURUSD pair has been in a bearish trend in the past few weeks. The pair has formed a descending channel that is shown in red. It is currently slightly above the lower side of this channel. The pair has moved below the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved to the oversold level. Therefore, the pair will likely rebound as bulls target the upper side of the descending channel.