Strategy
Sell 1.1440 for 1.0700 with a stop above 1.1700. Time duration could be about 3-6 months.
Technical View
Price has been on a decline since 3 January 2021 and over the course of almost 1 year, price has declined to a low of 1.1185. We do not think that this is the low. Rather we think there will be a corrective rally and after the corrective rally to 1.1500, we are likely to see price move lower to 1.0700, which is also the low back in March 2020.
Stochastic is inside the oversold zone and this is the reason why we think there is likely to be a corrective rally. A bunch of Doji candlesticks is supporting the stochastic indicator, hinting at a possible price low. However the trend is bearish as indicated by the declining 20EMA as well as the MACD indicator. In fact the 20EMA is pointing lower with a steep slope, hinting at a strong bearish price trend.
Fundamental View
The Federal Reserve, after its monetary policy meeting on Wednesday had indicated that taping amount will be increased and by March 2022, it will end its pandemic-era bond purchases. The Federal Reserve also announced that there will be a 0.75% interest rate hike in the year 2022. If we break that down to 0.25% interest rate hike that would be 3 interest rate hikes in 2022 after March. That could mean there will be an interest rate hike every quarter in 2022. There will be another 3 more interest rate hikes in 2023 and two more in 2024 to contain inflation.
The next day, after its monetary policy meeting, the European Central Bank keep its interest rate unchanged at zero percent. Current interest rate differential is in the US dollar’s favour. Going into 2022, this interest rate differential is likely to grow wider in favour of the US dollar, driving the Euro lower against the US dollar. The yields on US Treasury is likely to be higher than its European counterpart. This is also going to support demand for the US dollar and drive the Euro lower.
This divergence in monetary policy and interest rate hike between the Federal Reserve and the European Central Banks are likely to drive the Euro dollar lower against the US dollar. The spread of omicron in Europe is also likely to weigh on the Euro. The US dollar is likely to benefit from this Omicron crisis due to its status as a safe haven.