The EUR/USD exchange rate entered the new week's trading at its highest level in nine months. There is room for an extended recovery above 1.09 and towards the 1.10 resistance, as a more moderate global economic background and the tough policy stance of the European Central Bank (ECB) benefit the single European currency.
However, the EUR/USD currency pair stumbled after reaching the 1.0926 resistance at the beginning of this week's trading and returned amid profit-taking sales. It moved towards the 1.0846 support level, which is stable around it at the time of writing the analysis.
The selling in the EUR/USD pair came after an apparently erroneous press report suggested that some members of the ECB's governing council may be cold on pursuing hawkish interest rate guidance for December. That directive was that further rate hikes are guaranteed and likely to be delivered in half-percentage-point increments during future meetings, which remains very much the position if the latest recorded remarks from ECB Governor Christine Lagarde and others are anything to go by.
While energy prices have recently fallen and put downward pressure on inflation recently, ECB Governor Lagarde argued last week that price growth remains very high and the risks remain to the upside in part because unemployment is at "bottom compared to what we've had in the last 20 years".
Other board members also doubled down on December guidance over the weekend including Klaas Knot and Olli Rehn both suggesting that half percentage point increases in borrowing costs are still likely at the February and March meetings. This stance suggests that European interest rates are likely to rise faster than those of the Fed from February, with the latter expected to further dampen the pace of raising US borrowing costs due to an increase of 425 basis points.
Expectations for the euro dollar in the coming period:
“We think EUR/USD is likely to rally further towards our end-January target of 1.10 and possibly towards 1.16 by the end of the year (new forecast). But it's more of an inflation story in the US, Europe's recovering pretty big and there's a story of convergence of growth in Europe versus the US. The Fed increases significantly slow the US economy. Meanwhile, in Europe, the combination of fiscal stimulus and dramatically lower energy prices has turned negative headwinds to growth last year into tailwinds in early 2023.”
Overall ECB policy will be in focus again this week when Chairman Lagarde and Executive Board member Fabio Panetta prepare to speak publicly on monetary policy topics, although European business surveys released on Tuesday will be closely scrutinized by the market. The EUR/USD rate is also likely to benefit this week if Thursday's release of US Q4 GDP data supports the idea of a soft landing for the world's largest economy and if there is no turbulence from the core personal consumption expenditures (PCE) price on Friday.
The latter is a closely watched measure of inflation by the Fed and would pose an upside risk to US bond yields and the dollar if Friday's release throws a divergence with the latest CPI numbers, which suggest US inflation is now over the hill and on the decline.
EUR/USD Forecast:
- Recent gains moved the technical indicators towards overbought levels.
- Profit-taking sales could occur until the euro gains additional momentum to complete its recent gains.
- According to the performance on the daily chart below, the bears need to move towards the support levels 1.0780 and 1.0690 to confirm that the general trend has turned bearish.
On the other hand, and over the same period of time, the re-penetration of the resistance 1.0925 will be important for breaking the next psychological resistance 1.1000. The EURUSD pair will interact today with the announcement of the PMI readings for the manufacturing and services sectors from the eurozone and the United States.
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