Doubts. That's what ruined the euro. More precisely, it made EURUSD retreat. Investors were unsettled by the hawkish speech of FOMC member Christopher Waller, calling on the Federal Reserve to continue tightening monetary policy since there is no evidence of a sustainable move of inflation towards the 2% target, as well as Black Rock's statement that the Fed is not yet done with raising rates. It will add another 50-75 basis points. And the market had so much faith in the end of the monetary tightening cycle! Was it really wrong?

The consensus forecast of Bloomberg experts assumes a rise in the European Central Bank's deposit rate to 3.75% with its peak maintained until the end of 2023. The assessment coincides with the opinion of the futures market and is already reflected in EURUSD quotes. At the same time, the pair's rally was based precisely on the divergence in monetary policy: if the ECB was expected to add 75 basis points to the cost of borrowing, the Fed was not expected to do anything at all. At first, it was assumed that it had already put an end to monetary tightening in March. Then there was a possibility of an additional 25 basis points in May. As soon as it increased to 86%, the dollar also grew.

Bloomberg estimates for the ECB's deposit rate

The bullish drivers of EURUSD were not only the different pace of monetary tightening by the Fed and the ECB but also the divergence in economic growth, which changed the balance of power in the bond market. After the fall in gas prices, Europe got rid of such concepts as the energy crisis and recession. The United States, on the contrary, was getting closer to a downturn, especially after the bankruptcy of several credit institutions.

Fortunately for the dollar, Wall Street Journal experts did not change the probability of a recession within the next 12 months. It remained at 61%. At the same time, 58% of respondents believe that the banking crisis has already ended.

Discrepancies in monetary policy and GDP growth increased the attractiveness of European assets and contributed to the capital flow from the US to the euro area. This process led to a leading dynamic of European stock markets compared to the US one, which also laid the foundation for the EURUSD rally.

Dynamics of US and European stock markets

Thus, the market had a clear narrative, thanks to which it was expected that EURUSD would rise to 1.13-1.14 in 2023. However, as soon as investors had doubts, they immediately rushed to return to the US dollar. The market continues to move on emotions. Can we assume that one comment from an FOMC member and the opinion of the world's largest asset manager will overturn the uptrend in the main currency pair?

I don't think this will happen, however, no trend is immune to corrections, no matter how strong it may be.

Technically, on the daily chart of EURUSD, failing to stay beyond the upper limit of the fair value range of 1.0765-1.101 became the first sign of weakness for the bulls. If support at 1.09-1.095 fails, the pullback risks gaining momentum towards 1.0825 and 1.0765.