The PMI data could convince investors that the euro area economy is in a recession. This circumstance forces the ECB to start monetary easing earlier than the Fed. Let us discuss the Forex outlook and make up a trading plan.
Weekly Euro fundamental forecast
Markets move on expectations. Concerns about weak euro-area PMI data and expectations that the ECB will take the first step towards monetary expansion earlier than the Fed have dropped EURUSD to the lowest levels since mid-December. The pair is going down even against the backdrop of the S&P 500 breaking through all-time highs for the third day in a row. Divergence with the stock index cannot last indefinitely. It resembles a compressed spring that will straighten out sooner or later. Either the stocks will go into a descending correction, or the euro will soar.
The ECB will do its best to push back the start of monetary easing. The European Central Bank has previously faced criticism for being too late in responding to high inflation. And now, when geopolitics and supply chain disruptions may cause it to return. Christine Lagarde and her colleagues will prefer to play it safe. Moreover, the labor market in the currency bloc remains tight, and unemployment continues to remain at record-low levels. In such conditions, it is easier for workers to demand higher wages, which may become another factor in accelerating inflation.
On the other hand, the euro-area economy is stagnating, demand for bank loans is falling due to high interest rates, and consumer prices have collapsed from a peak of 10.6% at the end of 2022 to 2.9%. When CPI is rapidly approaching the target, the regulator is forced to act. After all, there is a risk that it will be necessary to cut the rates not by a quarter but by half a point at once. This would be a bad signal, indicating that everything is going wrong in the currency bloc.
Not surprisingly, the derivatives market expects the first drop in the ECB deposit rate in April and the Fed rate in May. At the same time, the overall scale of monetary expansion in both Frankfurt and Washington is estimated at 135 basis points in 2024. Forecasts for an earlier start to the monetary easing cycle in the euro area are the main driver of the EURUSD drawdown.
In fact, the European Central Bank does not have good solutions for the euro. If it follows the market expectations, the single European currency will fall due to the different speed of monetary easing. If the deadline continues to be pushed back to June, global risk appetite will worsen, and the US dollar will strengthen.
However, the principle “ buy the news, sell the fact” still drives the markets. The fall of EURUSD ahead of the European PMI report for January and the ECB meeting means that the negative has already been partially priced in the main currency pair. If the purchasing managers index or Christine Lagarde and her colleagues give a pleasant surprise, the EURUSD bulls will go ahead.
Weekly EURUSD trading plan
Until anything is clear, it makes sense to hold down the EURUSDshorts entered on the rebound from the resistance at 1.091. A potential rise following the PMI report will suggest adding up to the sell trades. The ECB has no good solution, while the S&P 500 looks overbought.
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