EUR/USD Mixed as EU Raises GDP Forecast, Awaits US Inflation Update
EUR/USD Analysis
The European economy avoided a contraction in the fourth quarter according to recent preliminary data, with the second reading expected on Tuesday. Today the European Commission projected that the Euro Area GPD will expand in Q4 by 0.1% and stagnate to 0.0% in the first quarter of 2023. It also upgraded its forecast for the current year, expecting growth of 0.9%, from 0.3% in the autumn forecast. [1]
The Commission also believes that inflation peaked last year and lowered its headline CPI projections to 5.6% in 2023 and 2.5% in 2024 (from 6.1% and 2.6% previously). ECB President Lagarde acknowledged some progress last week, speaking of "more balanced" risks to the inflation outlook. However, the bank intends to increase rates by another 50 basis points in March and to not stop there, in an overall very hawkish stance. [2]
Things in the United Sates are much better since price pressures have been moderating for a while now, with Chair Powell alluding to the fact again last week, saying that "the disinflationary process" has begun. This has allowed the Fed to slow down the pace of tightening, but Mr Powell insisted that the bank needs to increase rates further and stay at a restrictive level. [3]
Markets now gear up for the January CPI inflation figures, which are due on Tuesday and could affect the Fed's thinking and the trajectory of the US Dollar. Headline and Core CPI had both eased to the lowest levels in over a year in December.
EUR/USD slumped over the past two weeks, since the recent blockbuster jobs report followed by hawkish Fed commentary led to a repricing around the rate path. Markets now embrace the Fed's more aggressive dot-plot, with CME's FedWatch Tool assigning the highest probability to a terminal rate of 5.25%.[4]
The pair is subdued today below the EMA200, retesting the critical 23.6% Fibonacci of the September low/February high advance. A clear break could open the door for the 38.2% level (1.0481-51), although a catalyst would be needed of that and the downside seems well protected.
Despite the recent decline, the ECB has out-hawked its US counterpart and looks set to hike rates more this year. This is supportive for EUR/USD which can find renewed vigor towards 1.0930, although sustained strength past 1.1067 may prove harder in the near-term.
Nikos Tzabouras
Senior Market Specialist
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
References
| Retrieved 13 Feb 2023 https://ec.europa.eu/commission/presscorner/detail/en/ip_23_707 | |
| Retrieved 13 Feb 2023 https://www.ecb.europa.eu/press/pressconf/2023/html/ecb.is230202~4313651089.en.html | |
| Retrieved 13 Feb 2023 https://www.youtube.com/watch | |
| Retrieved 30 May 2023 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html |
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