Even in the short term, EUR/USD could fall some more as traders who have shifted from short to long positions are forced into liquidating those longs as the markets digest confirmation that the Fed will almost certainly tighten faster than the ECB in this cycle.
EUR/USD PRICE TREND LOWER MAY HAVE NOW BEGUN
Last Wednesday’s meeting of the Federal Open Market Committee, which decides on US , looks to have ushered in a new era of EUR/USD weakness – seemingly providing confirmation that the FOMC will tighten policy in this cycle well before the European Central Bank’s more dovish rate-setting Governing Council.
The Fed uses a so-called dot plot to signal its expectations of future changes in US interest rates, with each member of the FOMC represented by a single dot. That now points to the Fed raising rates twice by the end of 2023. By contrast, the ECB is still insisting that policy needs to remain loose. Indeed, its Chief Economist Philip Lane insisted just the day after the FOMC meeting that it is still premature and unnecessary to discuss the ending of the Eurozone central bank’s emergency bond-buying program.
From a long-term perspective, this has shifted the outlook for EUR/USD even if the Fed has really signaled only a slightly faster tightening cycle than before, and a new trend lower looks to have begun already.