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In the world of forex trading, people who deal in popular currency pairs like EUR/USD and EUR/JPY know they have to keep one eye on the American economy and another on the European. Each of these is, in our times, very interconnected with the success of Covid recovery programs on both continents. A weaker pandemic means economies can rebound more quickly. Traders also need to keep their fingers on the pulse of central bank economic policy on the part of the US Federal Reserve and the European Central Bank (ECB). Will interest rates be pulled up to normal levels, or will the dovish pandemic-relief policies we have been experiencing continue into the months ahead? There seems to be plenty of room for volatility in these currency pairs, especially due to factors like the stubbornness of the Delta strain of the virus and the uncertainty of analysts’ guesswork about Federal Reserve policy going into 2022.
In his speech on September 22, 2021, Federal Reserve chairman Jerome Powell indicated he may be willing to grow hawkish – that is, reduce bond purchases – sooner than expected if inflation exceeds certain limits. According to JP Morgan analyst David Kelly, the Fed is likely to start reducing its purchases in December. As to European interest rates, Pablo Hernandez de Cos, Governor of the Bank Spain, says that, since the target of a stable 2% inflation has not been met, indicators ‘Don’t allow us to anticipate there will be an increase’ in rates. He assures us that the ECB is still committed to its Pandemic Emergency Purchase Program (PEPP) for the present. One might say, then, that if the Fed is moving in a hawkish direction and the ECB is content to remain dovish, the EUR/USD could be influenced downwardly. Let’s try to paint a broader picture, though, by considering some of the recent history of this highly traded currency pair, and then attempt to take a peek at its future.
EUR/USD in 2020 and 2021
In 2020, the US Federal Reserve cut interest rates and introduced quantitative easing, which weakened the American currency. When 2021 dawned, however, the US dollar started to gain some of its strength back, so that in Q1 2021 the EUR/USD pair dipped down to touch 1.1170 by March 31st. Some of the reasons behind this were the successful vaccination drive in America, a weakened euro, the second eurozone lockdown, and the slow-running vaccination programs on the continent. In Q2, the euro rose again against the dollar, settling at 1.2270 on June 1st. This had to do with improved vaccination rates in Europe as production delays were overcome and people grew less hesitant to go in and get their shots. By the 20th of June, 28% of European adults were fully vaccinated.
However, from June the dollar began strengthening again. Part of the reason behind this was that inflation concerns led traders to anticipate a raise in interest rates. An indicator that reflected these concerns was the US Consumer Price Index (CPI) which jumped up by 5% in May. After that, in the middle of August, the dollar achieved a nine-month high. Not for the first time, though, the pandemic began to complicate matters. Third quarter economic growth in the USA was held back by the Delta strain which interfered with supply chains all over the world.
Towards the end of September, the US dollar was on a run of strong performances against the euro, such that the EUR/USD was bearish and fell to 1.1589, a one-year low. This strong bearish trend may have encouraged many traders, who expected the euro to rebound, to gravitate toward buy deals.
Analysts do not agree on how the US dollar will trade in the coming months, and many admit they simply don’t know. In the meanwhile, the American currency is in demand due to expectations of raised interest rates at some point in the coming months. After all, Jerome Powell made himself clear in his assurance that ‘If persistently high inflation becomes a major concern, we will certainly respond and use our tools to ensure inflation is operating at levels consistent with our objective.’ At the start of October, the euro was less in demand due to unimpressive Eurozone economic results and to the ECB disinclination to abandon its dovishness.
The euro hasn’t only been weakening against the dollar. In early October, it fell to 128.59 against the Japanese yen. For those involved in CFD forex trading in well-traded currency pairs like EUR/JPY and the EUR/USD, it is wise to keep up with economic news in Europe, Japan, and the USA, but also with pandemic progress and central bank monetary policy. Trader in CFDs (Contracts for Difference) trade on the price movements of currency pairs like these, whether they be up or down. This kind of trading facilitates opportunities as well as risks and should be engaged in responsibly and
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