Is the ECB’s neutral stance good for the euro? At first glance, yes, since there is a belief that the Fed will be the first to cut rates. However, will it undermine the rise in global risk appetite and the EURUSD rally? Let’s discuss this topic and make up a trading plan.
Weekly Euro fundamental forecast
All central banks are satisfied that inflation is slowing, but each of them is displeased in its own way with the pace of its decline. The Fed intends to once again perform under the dual mandate and prevent unemployment from rising too quickly. The ECB is not ready to follow Washington, which contributed to the EURUSD rise to 1.1. However, disappointing eurozone PMI and neutral statements from FOMC officials made investors doubt the existing market conditions and took the pair below the critical level of 1.094.
Investors have not yet recovered from the shock provoked by the Fed’s dovish reversal, as they have to get used to the new reality. How to interpret the ECB’s reluctance to follow in the footsteps of the Federal Reserve? Is it positive for the euro since the American central bank will act as the pack’s leader? Or is it negative, since long-term retention of deposit rates at 4% negatively affects European stock indices?
Based on the first point of view, the disappointing eurozone PMI is a reason to sell EURUSD. Officials can say whatever they want, but the ECB’s policy is data-dependent. The data signals that the eurozone is in recession, which means rates need to be cut.
The fall in the 10-year German bond yield to the very bottom since March showed that markets do not trust the Governing Council. On the other hand, a Reuters insider claims that at a December meeting, officials agreed that until March, they would stick to the words about a possible resumption of monetary tightening. This reduces the chances of a reduction in the deposit rate before June to almost zero. Keeping borrowing costs high is bad news for risk assets and EURUSD.
Moreover, in the US, FOMC officials tried to show the market that it incorrectly interpreted Jerome Powell’s speech. New York Fed President John Williams said that the Fed is not actually going to cut the federal funds rate right now. It is premature to think about a fall in borrowing costs in March. As a result, derivatives have reduced the chances of this month’s start of monetary expansion from more than 80% to 74%.
Atlanta Fed Chairman Raphael Bostic believes that the Fed should not ease monetary policy until the second half of 2024. Chicago Fed Chairman Austin Goolsbee argues that inflation has not yet been defeated. Decisions on rate changes will be made based on incoming data.
Weekly EURUSD trading plan
The reluctance of FOMC members to support Jerome Powell’s dovish stance and weak eurozone PMI made investors doubt the continuation of the EURUSD rally and exit longs. As a result, the pair dropped below 1.094. Only the pair’s return above this level will make purchases relevant again.
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