Since the beginning of the year, Forex has been fixated on three exchange rate drivers. First, on reflation, which implied a large-scale monetary stimulus and the Fed's willingness to allow the economy to overheat. Secondly, on the double deficit of the US - the current account and the budget, which required an influx of capital into the country in order to finance it, and this, in turn, implied a weakening of the national currency, that is, a fall in the USD index. Third, on the acceleration of global economic growth, which is bad news for safe-haven assets, including the US dollar. It is not surprising that investors bought EUR/USD, but in the market, as in life, nothing is constant.

Global economic growth can hardly be called synchronous. At the beginning of 2021, the eurozone slowed down, where the start of the vaccination campaign against COVID-19 left much to be desired. Then problems arose in India, Japan, Australia, and even in China due to large-scale or local outbreaks of the pandemic. As a result, the US economy with its potential 7% growth this year looks like a kind of bright spot on a dark background. It is strong, which means that the dollar should also be strong.

If for most of 2021 the Federal Reserve did not get tired of repeating its mantra about the temporary nature of the acceleration of inflation, then with each new report on CPI and PCE, its mood changed. Should we remain unperturbed and continue to sit on the sidelines if consumer prices have accelerated to 5%, and the index of personal consumption expenditures has increased to 3.9%? It should not be surprising that in such a situation, five Fed officials have already started talking about raising the rate in 2022, many are talking about the need to start tapering QE this year.

In fact, the sellers of the dollar have only one trump card left – a double deficit, but, as history shows, its influence can restrain the strengthening of the exchange rate, but it will not become an insurmountable obstacle to divergences in monetary policy or in economic growth. In the end, if the differentials of the real rates of the debt and futures markets indicate a further decline in EUR/USD quotes, so be it!

Dynamics of EUR/USD and the spread on interest rate swaps

Along with real rates, factors such as the dynamics of central bank balance sheets and different inflation rates in the United States and the eurozone speak in favor of the weakening of the euro against the US dollar. If the ECB does not intend to terminate the emergency asset purchase program at least until March 2022, and the Fed may surprise the markets at the end of July with its decision to taper QE, especially in terms of mortgage bonds, then it can be assumed that the further dynamics of their balance sheets will play into the hands of EUR/USD bears. The higher inflation is, the faster the process of monetary restriction will go. And here the dollar wins.

Technically, the EUR/USD quotes continue to move in the direction of the 88.6% target according to the Shark pattern. Their presence below the moving averages suggests that the market is dominated by bears. Therefore, either we simply sell the pair with the targets at 1.177 and 1.171, or wait for the rebound from the resistance at 1.1885 and 1.193 to form shorts.

EUR/USD, Daily chart