- The euro weakened against the pound and the dollar at the end of last week, after ECB President Christine Lagarde signalled that the central bank could cut interest rates.
- Technically, after briefly testing the psychological resistance level of 1.1000. the EUR/USD pair fell back to 1.0935 on Friday before closing the week around 1.0950.
- Overall, the euro was set for a flattish end to last week after Lagarde spoke about the possibility of rate cuts amid growing confidence that inflation is on track to reach the 2.0% target.
- Recently, the euro was the second worst-performing major currency on Friday in a weak performance that came alongside Lagarde's comments that "the hardest and worst part" of the fight against inflation is over.
Meanwhile, analysts said that these comments were behind the rise in European stocks, as investors became more confident that rate cuts could happen in May. The general rule is that increased bets on rate cuts from the ECB, relative to other places, weigh on eurozone bond yields and the euro. Moreover, Lagarde said in an interview with France 2 television: "I believe that interest rates, barring any other shocks or unexpected data, will not continue to rise. Therefore, if we win our battle against inflation, and if we are confident that inflation will indeed be at 2%, at that point interest rates will start to go down."
So far, ECB President Lagarde has declared that it is too early to talk about interest rate cuts, arguing that wage growth in the eurozone means that a drop to the 2.0% target on a sustainable basis will be out of reach. By setting the terms for the reduction, Lagarde indicates that there is a pivotal shift.
Based on Forex market trading, this is certainly not a major weakness in performance, but we notice some distinctive elements of the euro's weakness. This is due to its decline against all other major currencies, except for the Swiss franc. Also, Lagarde added that she would not set a date for cutting interest rates, although she said that inflation would reach 1.9% by 2025. Moreover, Economies Inflation in the euro zone rose to 2.9% in December from 2.4% in November, largely due to base effects in last year.
After pushing ahead with the most aggressive tightening campaign in decades during 2022 and 2023, central banks around the world are preparing to start easing monetary policy as inflation continues to decline. The shift was monitored by Bloomberg Economics, whose overall measure of interest rates around the world shows a decline of 128 basis points over the year, most of them led by emerging economies. Poland, Serbia, and Korea kept interest rates steady last week, while Peru cut interest rates. Just days into 2024, which was supposed to be the year inflation disappeared, manufacturers and retailers are once again dealing with delays and facing higher expenses as ongoing attacks by Houthi rebels in the Red Sea rock the main shipping route through the Suez Canal. Consequently, red sea freight rates for goods from Asia to Europe have more than doubled over the past four weeks.
Over the next few weeks, governments in the United States, Britain, and the eurozone will begin flooding the market with bonds at rates rarely seen before. Burdened by a kind of inflated deficit that was once unimaginable. Obviously, these countries – along with Japan – will sell a combined $2.1 trillion in new bonds to finance their spending plans for 2024, an increase of 7% from last year, according to estimates by Bloomberg Intelligence.
EUR/USD Technical Analysis and Forecast:
According to the performance on the daily time frame chart, the price performance of the EUR/USD is still neutral. Technically, an upward shift will not occur without stability above the psychological resistance of 1.1000, which may stimulate technical buying deals, and the shift will be more certain to the upside if the Euro currency pair moves. Recently, the dollar has been moving towards resistance levels 1.1065 and 1.1120, respectively. On the other hand, over the same period, the move towards the support level of 1.0880 will be important for bears to have more control over the trend. Today, there is an American holiday that may affect investor sentiment and liquidity. Therefore, we expect limited movements for the EUR/USD pair today.
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