EUR/USD is caught between the push me-pull me affects of U.S. and eurozone monetary policies, something EUR/USD traders should use to hedge for the year ahead.
As a consequence of changing Fed policies EUR/USD entered a steep decline from 1.2266 to 1.0349 and then bounced to 1.0787 due to speculation about the extent of ECB tightening.
This fulfilled the minimum criterion (38.2%) for a correction of the drop from 2022's peak at 1.1495 to the year low at 1.0349.
EUR/USD has since fallen reaching 1.0611 after the CB detailed its plans.
The Fed plans to hike interest rates further than ECB and crucially will reduce its balance sheet when ECB will not.
The result should be a further EUR/USD decline albeit slowed by ECB policy.
There is cause to expect rallies in advance of ECB meetings and dips ahead of Fed meetings, and potentially a sizeable recovery ahead of ECB's Sep 8 meeting if a 50bps hike becomes likely.
Recoveries are opportunities to hedge for the deeper decline that will result from greater changes in the U.S.
This should result in a ratcheting decline with a series of lower EUR/USD ranges unfolding this year with the current range evolving near 1.05-1.08.
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