- The U.S. Federal Reserve keeping interest rates unchanged as expected and at the same time emphasizing that it is in no hurry to cut rates helped the U.S. dollar make stronger gains against other major currencies.
- The euro dollar pair fell to the support level of 1.0794 before settling around the 1.0820 level at the start of today's Thursday session.
Before the U.S. central bank announcement, headlines welcomed the decline in German inflation from 3.7% in December to 2.9% in January. Inflation in the EU is now 3.1%. However, there are still concerns about price pressures and the readings are not impressive when looking at the granular details. The euro price did not move much after the report was released. The preliminary readings of Germany's consumer price index were also released, showing a slight 0.2% gain. This led to a small rise in the euro price but this report was mixed and needs a closer look before making assumptions about its impact. But media reports on the German CPI may focus on the large year-on-year decline which brought the January headline number to 2.9%, down from 3.7% in January. This is the lowest rate since June 2021 and very close to the ECB's inflation target.
However, there are some details that may continue to worry the ECB. First, the large year-on-year decline was largely due to the base effect as the January 2023 figure was over 9%. Additionally, price pressures clearly still exist. As ING bank pointed out, these favorable base effects mask a more worrying trend of monthly price increases. In fact, the monthly increase in consumer prices was actually higher than it was previously in January; prices for goods and food accelerated in particular.
Overall less favorable base effects will come into play later this year which could drive the headline number up again. There is also potential for supply chain tensions and rising shipping costs due to the conflict in the Red Sea. ING bank expects German inflation to hover around 3% in 2023 – so the recent 1% decline towards the ECB’s target may prove a struggle.
The ECB will now face a dilemma – the 2.9% headline and large decline since December will fuel speculation that they may cut interest rates sooner rather than later. Additionally, the weak economic data out of France and Germany puts pressure on them to cut rates. However, the granular details of the German CPI suggest any cut may be a step too early.
EUR/USD Expectations Today:
The general downtrend for the EUR/USD currency pair remains in place and as I mentioned before, moving below the key support level of 1.0800 will increase the strength and control of the bears over the direction. At the same time, it warns of a stronger downward movement and the next most important support levels may be 1.0750 and 1.0660 respectively. From the last level, the technical indicators will move towards levels of strong oversold conditions. On the other hand, and according to the daily chart performance above, there will be no initial reversal of the general downtrend without moving back towards the key psychological resistance level of 1.1000 again.
The EUR/USD price will be affected today by yesterday’s U.S. central bank announcement. Then according to the economic calendar data, Lagarde’s statements and eurozone inflation figures, followed by the announcement of weekly U.S. jobless claims and the reading of the manufacturing index.
Ready to trade our Forex daily analysis and predictions? Here are the best regulated trading brokers to choose from.