- With the US Federal Reserve keeping interest rates at their highest level in 22 years, the EUR/USD found an opportunity to rebound higher in early trading on Thursday.
- Recently, its gains reaching the 1.0602 level after yesterday's losses, which reached the support level of 1.0516.
- Despite the announcement, the US dollar remains the stronger currency, as the bank promised to continue raising US interest rates based on the incoming economic data, in addition to the continued demand for it as a safe haven as long as the conflict in the Middle East continues.
What is expected for the Euro/Dollar in the coming period?
The euro's resilience against the dollar EUR/USD will fade as recent strength does not reflect the fundamental differences between the economies of the United States and the eurozone. This is according to a new analysis by Rabobank, a Dutch multinational bank, which also finds that much of the euro's recent strength may be the result of a position adjustment following the sharp selloffs in July and October.
In this regard, Jane Foley, Rabobank's chief forex analyst, said: “The fundamentals do not seem to justify the current euro rally, and we expect the position adjustment function to be linked to the strong sell-off in the euro/dollar pair in recent months.”
The sell-off in the EUR/USD exchange rate from the July high of 1.1275 to the October low of 1.0448 allowed the currency market to adjust to the “higher for longer” expectations for US central bank interest rates. It also allowed the market to absorb “a lot of bad news regarding the German economy.” Accordingly, EUR/USD has risen to 1.0657, with selling declining in recent months and the market reaching “peak pessimism” towards the euro zone. Therefore, gains this week were supported by a better-than-expected German GDP reading and news on Tuesday that inflation had fallen below 3.0%, reducing the risk of stagflation. Moreover, with core inflation remaining closer to 4.0%, the ECB is likely to avoid any discussion of interest rate cuts.
Meanwhile, It was also reported this week that Eurozone GDP for the quarter registered a contraction of -0.1% on a quarterly basis. The combination of inflation and growth numbers may allow the ECB to consider cutting interest rates as early as the first half of 2024, which could eventually weigh on the euro.
According to the analyst’s view, “The general picture is one of declining inflation in the euro area, which will reinforce the view that interest rates at the European Central Bank have reached their peak.” Indeed, while policymakers will be reluctant to talk about expectations of interest rate cuts if inflation remains above the ECB's 2% target, the market is starting to speculate on such a move in the second quarter of 2024.
In contrast, Fed interest rates are seen at the same current levels in this time frame. According to the analyst, “Fundamentals do not seem to justify the current boom in the euro.” Also, Economists at Rabobank expect the euro zone to fall into recession in the second quarter based on incoming survey data. Finally, Rabobank expects another downward move for EUR/USD to 1.02 over 3 months.
EUR/USD Today Expectations and Analysis
According to the daily chart below, the overall trend for the euro/dollar pair is still bearish, and a move towards the psychological support level of 1.0500 is possible, which confirms the strength and dominance of the bears on the trend. The euro/dollar will remain under downward pressure if the US dollar is the stronger currency due to expectations of interest rate hikes and demand for it as a safe haven. Therefore, a first break of the current downward trend will not occur without the bulls moving towards the resistance levels of 1.0730 and 1.0800, respectively.
The EUR/USD will be affected today by the release of the reading of the industrial purchasing managers' index for the eurozone, followed by the US data on weekly jobless claims and the non-agricultural productivity index, in addition to the level of risk appetite of investors. Shortly, The most important thing tomorrow will be the announcement of US job numbers.
Ready to trade our Forex daily forecast? We’ve shortlisted the top forex brokers in the industry for you.