Market Overview

How Central Bank Policy Divergence Will Impact EUR/USD

 

EUR/USD
-0.19%

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Risk-on has been seen since yesterday, and the trigger was the BoC rate decision, where the future message was more important than what they did. They hiked for 25bp, but they are planning to pause rate hikes now, and speculators believe that after BoC and FED, other CB will follow the path.

However, it can still depend from country to country, especially if we consider that inflation in Australia, for example, is not coming down; it was up, as reported this week. Potential CB divergence can make interesting trends on FX crosses rather than on FX significant pairs.

However, the USD can see some unexpected bounce if we consider that a lot of its weakness over the last few weeks came from a strong EUR and speculation that FED will stop the hiking cycle soon.

Now, imagine if ECB disappoints next week and they do not deliver hawkish action. In such a case, we may see strong market reversals, especially if we consider that a lot of dollar weakness is already priced in and FED sticks to the plan. Buying the rumor and selling the news can cause a bounce on DXY, while EUR may drop sharply.

From an Elliott wave perspective, EUR/USD remains bullish but is seen in a fifth wave, now approaching the 1.10 level.

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