The monetary restriction cycles have ended, but central bank officials are afraid of weakening financial conditions and are forced to lie. However, sooner or later, the truth will come out. Let’s discuss this topic and make up a trading plan for EURUSD.
Weekly Euro fundamental forecast
The head of the Bank of France, Francois Villeroy de Galhau, was the first among the chairmen of the world’s leading central banks to find the courage to declare that interest rates will no longer be raised. Unless, of course, something extraordinary happens. His speech contradicts the latest minutes of the ECB meeting, where the Governing Council maintained the chances of resuming the monetary restriction cycle and called on policymakers to avoid undue weakening of financial conditions. There is a split in Europe. However, the EURUSD has already experienced this.
According to the head of the Bank of Belgium, Pierre Wunsch, market hopes for a reduction in borrowing costs by 100 bps in 2024 are not only unfounded but also harmful. They may have the opposite effect, forcing the ECB, worried about weakening financial conditions, to tighten monetary policy. Commerzbank officials do not rule out such a scenario. Following the release of eurozone PMI data, they said that investors hoping for a reduction in deposit rates would be disappointed due to still high inflation pressures caused by rising wages.
Indeed, an ECB survey showed that wage growth accelerated from 4.4% to 4.7% in the third quarter. Purchasing managers also noted rising inflation pressures as costs in the labor-intensive services sector rose at their fastest pace since May.
Overall, eurozone data showed that the currency union continues to sink into stagflation. The PMI remained stuck below the critical level of 50 for the sixth month in a row, signaling a technical recession, while prices remain high. At the same time, Germany’s data was strong, while France, on the contrary, was disappointing. It is not surprising that Francois Villeroy de Galhau announced the ending of the monetary restriction cycle, which has already brought many problems to his country.
However, Germany has enough problems. According to Bloomberg, the budget crisis in the country could lead to many infrastructure and environmental projects not receiving funding. As a result, GDP growth risks slowing by 0.5 pp in 2024, and hopes for economic recovery will fade.
The situation for EURUSD bulls looks terrible after the victory of Eurosceptics in the parliamentary elections in the Netherlands, who plan to hold a referendum on the country’s membership in the EU. It is difficult to have confidence in a currency that has a struggling economy and political squabbles behind it.
Weekly EURUSD trading plan
However, the US dollar has unfavorable conditions too. When Treasury yields fall and stock indices rise strongly, the greenback will have a hard time. It turns out that both currencies in the pair are feeling shaky, which increases the risks of short-term consolidation in the range of 1.082-1.102. I recommend selling EURUSD when it rises towards its upper border and buying when it falls towards the lower border.
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