In the beginning of European trading, there was a decline in stocks and major currency pairs, while the value of the dollar increased. This was due to investors lowering their expectations for a rate cut by the Federal Reserve in March. The EUR/USD briefly reached a new low for the year at 1.0874, dropping below last week’s low of 1.0877, before experiencing a slight recovery.
EUR/USD analysis: Euro could find support from ECB pushback, data
If policymakers at the ECB persist in resisting significant rate cuts in 2024, there is a possibility that the euro may recover and increase in value.
During the World Economic Forum in Davos, Switzerland, on Monday, Robert Holzman, a member of the governing council of the European Central Bank (ECB), expressed the potential for no rate reductions in the coming year. He contradicted the anticipation of a rate cut in April.
This morning, we received data that was more robust than anticipated.
The German ZEW economic sentiment indicator, which was predicted to decrease to below 12.0 from 12.8, actually increased to 15.2. German institutional investors and analysts who were surveyed also reacted more positively when evaluating the Eurozone’s economic outlook for the next 6 months – the ZEW Economic Sentiment for the single currency block unexpectedly improved to 22.7 from 23.0.
The German economy shrank by 0.3% in 2023 due to a decrease in economic confidence. There is concern that Germany, the biggest economy in the Eurozone, might experience a two-year recession if inflation and high interest rates continue to hinder the spending of consumers and businesses.
Therefore, it is in the best interest of everyone that the ECB acts promptly to lower interest rates once inflation returns to normal levels. The confirmation of a 3.8% German CPI in December, an increase from 3.2% in November, reinforces the ECB’s belief that achieving their 2% target may take time and face obstacles.
US data, FedSpeak in focus
The focus will now shift to the US and the strength of the dollar as we move into the US session, particularly for the EUR/USD. Along with the announcement of various corporate earnings and the Empire State Manufacturing Index, there will also be a speech by FOMC member Christopher Waller at 16:00 GMT. However, the most important US data to watch out for is the release of retail sales on Wednesday, followed by consumer confidence data (UoM) on Friday.
After the release of positive CPI data and employment figures in the previous weeks, several analysts anticipate that the Federal Reserve will postpone the rate reduction until after their March meeting. However, traders in interest rates were largely convinced that the initial cut would occur during the March meeting. Presently, the likelihood of a rate cut in March has declined to approximately 70%, which contributes to the explanation for the strength of the dollar.
Also Read: Dollar soars on rising interest rate expectations, euro and Aussie dollar tumble
EUR/USD technical analysis
Despite reaching a new low for the year, the EUR/USD has only been trading for two weeks. It has dropped around 160 pips from its opening level of 1.1038 to its current low. However, this indicates that there have been no significant movements in the market so far this year. Therefore, it is important not to become too pessimistic based solely on today’s bearish price action. Key support for the EUR/USD is still holding between 1.0845 and 1.0900, where the 200-day simple moving average, bullish trend line, and previous support/resistance all come together. It is possible that the currency pair could rebound from its current levels. On the other hand, resistance can now be found at 1.0935, which is the base of today’s breakdown. The next important levels to watch for are around 1.10.
