- Amid a quiet economic calendar this week, the EUR/USD pair remains stable around its recent losses, which reached the 1.0722 support level, the lowest in nearly two months, as the US dollar remains the strongest due to better US economic results and the hawkish US Federal Reserve policy.
- In contrast, the Eurozone economy remains the weakest and the future of the European Central Bank's tightening is a matter of disagreement among analysts.
- Overall, the European Central Bank faces a difficult balancing act that it must accomplish in 2024.
- On the one hand, they need to keep their policies restrictive to prevent another outbreak of inflation, but on the other hand, they are under pressure to cut interest rates to stimulate the slowing EU economy.
Will the Euro Price Rise in the Coming Days?
The Euro price is drifting lower as weak economic news results suggest that cuts will be necessary sooner rather than later. This week witnesses a lull in data releases, and this gives the markets an opportunity to price correctly in some of the events of the past few weeks. Especially, the re-acceleration of US economic data and the re-pricing of expectations regarding the date of the US Federal Reserve Bank. Moreover, the US dollar was in good shape and briefly broke through the December high but retreated slightly again and the situation appears to be “too far, too fast.”
Meanwhile, the euro rate remains on the weak side and EUR/GBP is back near its 2024 lows at 0.8513. Data from the European Union was disappointing and was several levels below the strong readings seen in the United States. Also, it lags behind data from the UK, which was expected to be worse off in 2023. While the ECB has tried to maintain a hawkish stance, and appears genuinely concerned about the possibility of a return of inflation, a slowdown in the EU economy may force cuts. Sooner rather than later, which is reflected in the weak performance of the euro.
In an interview with the Financial Times published on Wednesday, European Central Bank Governing Council member Isabel Schnabel issued some warnings about continued inflation. She is considered the most hawkish member of the ECB's six-person Executive Board, so her view on inflation and monetary policy is not necessarily universal, but with those views made public, other members may feel uneasy about easing too early. “I'm not saying inflation will happen,” he said. Added, “This is not my baseline, but I think it is a risk we have to be prepared for.” Furthermore, “…We are now entering a critical phase where the calibration and transmission of monetary policy becomes particularly important because it is all about containing the effects of the second round.”
Also, Schnabel pointed to the “last mile,” which is widely viewed as the difficult final stage of getting inflation under control and then easing interest rates again.
We had already witnessed this difficult final stage in the United States of America, where rapid progress was made to reach an inflation rate of 3%, but then it stopped for several months and even rebounded slightly. The 2% target still seems difficult to achieve. Concerns about another outbreak of inflation must be balanced with a focus on the EU economy, which has been in recession for some time. Recent PMI readings have shown some improvement, but Germany has been a particular concern, and this was confirmed again on Wednesday with the release of industrial production data.
At the same time, German industry is still stuck between cyclical and structural weakness. Industrial production fell by -1.6% on a monthly basis in December from -0.2% monthly in November. Over the course of the year, German industrial production fell by 3% and is now about 10% below its level before the pandemic. Also, ING Bank noted on Wednesday morning that production in energy-intensive sectors fell by approximately 6% on a monthly basis. This type of weak data has been going on for over a year now, and the European Central Bank's restrictive interest rate policy is partly responsible for it. Moreover, Germany has been hovering around recession and could remain there throughout most of 2024. Hence, there will be pressure on the ECB to ease once inflation appears to be under control. Obviously, this may be faster than those like Schnabel would like, but the final say goes to President Lagarde and the other members.
EUR/USD Technical Analysis and Forecast:
There is no change in our technical view of the performance of the price of the pair of EUR/USD, as the general trend remains bearish and stability below the psychological support level of 1.0800 confirms the bears’ control and portends a stronger downward move. Technically, the closest ones currently are 1.0710 and 1.0650. Obviously, the technical indicators from the last level will move towards strong selling saturation levels. On the other hand, according to the performance on the daily chart above, there will be no reversal of the EUR/USD trend upward without moving towards the psychological resistance level of 1.1000 again.
Ready to trade our Forex daily forecast? We’ve shortlisted the best FX trading platform in the industry for you.