- With the start of trading week of the European Central Bank interest rate announcement, the EUR/USD pair is trying to recover, stabilizing around the 1.0905 level.
- Generally, trading last week was bearish for the EUR/USD pair, falling to the support level of 1.0844.
- Recently, the US dollar is still ahead in terms of future monetary policy tightening, and at the same time, demand for buying the US dollar has increased amid rising global geopolitical tensions, starting from the Middle East region.
Overall, the euro against the dollar EUR/USD could benefit from the European Central Bank decision later this week, although it is widely expected that the central bank will keep its policy unchanged and refrain from providing forward guidance. Moreover, the data was weak for the most part, but other financial factors may be enough to keep inflation trends within target, so policymakers may find it prudent to stay put.
Meanwhile, the US dollar could take cues from the advanced US GDP figure, which is expected to show a slower growth pace in the fourth quarter of 2023, and the core personal consumption expenditures price index. Slightly, there are higher price pressures, but this may not be enough to reduce the likelihood of a rate cut later in the year. Figures for the Purchasing Managers' Index for the euro area and the United States are also scheduled to be released, which could lead to volatility for the EUR/USD pair as these key indicators could also help to determine the next step for policy.
The highlight in the region will be the European Central Bank decision on Thursday. Officials, led by President Christine Lagarde, are expected to keep rates unchanged at their first meeting of the year. The governing council appears to be converging around a possible rate cut in June, while markets show a two-in-three chance that the first cut will come in April. Meanwhile, Lagarde's comments will be parsed for any hints about the timing of that first move.
The focus of economic data in the region will include the preliminary readings of the first 2024 purchasing managers' surveys – due to be released on Wednesday – with similar reports also due in the United Kingdom.
Meanwhile, the IFO business confidence index in Germany will be released on Thursday, giving an indication of whether the contraction that the largest economy in Europe experienced in the fourth quarter is about to come to an end. Also, the European Commission is due to unveil the economic security package, which will include new rules to increase scrutiny powers and the possibility of preventing foreign investment in sensitive industries. Moreover, Other measures under consideration include the creation of a dedicated fund to boost the development of technologies that can serve both military and civilian purposes.
Prior to this week's announcement by the European Central Bank, Eurostat, the data warehouse of the European Commission, announced the inflation readings for the consumer price index for December 2023. In December, inflation in the euro area rose by 2.9%, after rising by 2.4% in the November period. Previously, the European Union saw a higher aggregate inflation rate of 3.4%. historically, this is the second consecutive month that inflation has risen, after the November 2023 figures ended a seven-month streak of consecutive declines in the region.
According to the European Central Bank (ECB), inflation in the euro area fell to 2.4% in November 2023. Likely, this news is to raise further doubts about the possibility of the ECB cutting interest rates soon.
EUR/USD Technical Analysis and Forecast:
The EUR/USD exchange rate made two failed attempts to break below the minor psychological level at 1.0850 and is now testing resistance around the major psychological level at 1.0900. technically, a break above the lower double neckline could lead to a rally of the same height as the formation, or about 50 pips. However, the price has yet to break the dynamic resistance of the 200 SMA to confirm the rise.
Regarding moving averages, the 100 SMA is below the 200 SMA to confirm that the overall trend is turning bearish or that selling pressures are likely to gain momentum instead of reversing. The gap between the moving averages is also widening, reflecting the strength of the selling pressure. At the same time, the Stochastic oscillator indicates overbought levels for some time, so a downward trend may signal a return of bearish pressure. Obviously, this could lead to a return of the Euro against the US Dollar (EUR/USD) to lows or even lower. Finally, the Relative Strength Index (RSI) has room to rise before reflecting exhaustion among buyers, so the EUR/USD price may continue to follow the same approach while the oscillation indicator moves higher.
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