- Since the start of this week's trading, the price of the currency pair EUR/USD has been trying to rebound upward with gains that reached the resistance level of 1.0838 before settling around the level of 1.0810 at the time of writing the analysis and prior to announcing the content of the minutes of the last meeting of the US Federal Reserve, the most important event for the Forex currency market.
- For this week. Recently, the US dollar gained more gains considering the strong performance of the US economy, despite the tightening policy of the US Central Bank, and contrary to what was expected, it would quickly stagnate under that policy.
On the other hand, wage settlements negotiated in the euro zone have reached their peak and will decline over the following months, opening the door to “early” interest rate cuts at the European Central Bank, which HSBC says will affect the euro against the US dollar. Also, the European Central Bank's latest assessment of negotiated wages showed that negotiated wages rose by 4.5% at the end of 2023. This data constitutes a key tool used by ECB policymakers when considering expectations of wage changes and the potential impact on inflation.
In this regard, according to analysts, negotiated wages in the euro zone have begun to decline, with the peak reaching the third quarter of 2023. Therefore, the most likely path is a decline as underlying inflationary pressures in the euro zone decline. “The door to earlier interest rate cuts by the European Central Bank remains wide open on the assumption that price pressures remain weak in the first quarter.”
For its part, the European Central Bank said that it will not consider cutting interest rates until it has more clarity on the state of wage pressures in the first part of the year. Moreover, policymakers want to see wages fall in a way that is consistent with inflation falling to the 2.0% target on a sustainable basis. Financial markets see a good chance that interest rates will be cut for the first time in May, with the cut being priced in by the full month of June.
HSBC Bank expects the start of interest rate cut cycles in 2024 to be somewhat negative for the EUR/USD pair, even if the cuts are priced in by the markets. In this regard, Dominic Bunning, Head of Forex Currency Research at HSBC Bank, says, "We have identified six interest rate cut cycles since the establishment of the European Central Bank. Recently, the average performance of the euro against the US dollar during these cycles was -5.2%."
Consequently, HSBC Bank warns that the largest declines in the euro's price occur when European Central Bank interest rate cuts are accompanied by specific concerns about the eurozone, as was the case during rate cut cycles in the first decade of the 21st century.
EUR/USD Technical Analysis and Forecast:
According to the performance on the daily chart above, the price of the currency pair EUR/USD is on an upward rebound path, and attempts to rebound will not succeed without moving above the 1.0885 resistance again. Technically, the complete shift of the general trend to the upside will occur by moving towards the psychological resistance of 1.1000. Currently, the general outlook is still bearish, as the Euro/Dollar price is closest to returning below the psychological support level of 1.0800. Considering that the reaction to the announcement of the content of the minutes of the last meeting of the US Federal Reserve Bank will be the strongest driver for the currency pair in one of two directions in the remainder of the week’s trading.
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