Weak PMI’s Douse the Post-Fed & ECB Advance of EUR/USD

  • EURUSD
    (${instrument.percentChange}%)

EUR/USD Analysis

The US Federal Reserve maintained rates at 5.25-5.5% for third straight meeting in a row and embraced upcoming rate cuts. Its updated projections revealed a faster pace of easing than previsouly expected, as the median rate for 2024 is now seen at 4.6% (from 5.1% previously) [1]. This suggests at least three rate cuts or 90 basis points of cuts. Markets are more aggressive, with CME's FedWatch Tool currently assigning the highest probability to rates falling at 4% by the end of the next year. [2]

The European Central Bank also stood pat a day later, but the similarities end there. It once again pointed to peak rates, but pushed back against market bets for cuts, despite lowering its inflation projections. In contrast with their US peers, European officials "did not discuss rate cuts at all" according to Ms Lagarde. The ECB President warned that "there is still work to be done and that can very much take the form of holding". [3]

EUR/USD rallied this week, due to the divergence between the two central banks. The US Fed pointed to rate cuts, while its European counterpart dismissed any such talk. This has brought 1.1276 in the spotlight, but we remain cautious around the common currency's ability to take that level out.

However, CPI Inflation in Eurozone has decelerated sharply to 2.4% in November, while the US data showed persistence, with CPI staying above 3%. The European economy contracted in the third quarter, whereas the US one is overperforming. This places the ECB at a better position to begin loosening its stance and the Fed did not take more tightening off the table, despite its dovish shift.

Today's weak preliminary PMIs from Eurozone and Germany strengthen the case for a Fed pivot and douse the EUR/USD advance. The failure to set higher highs and the slide create scope for a test of the EMA200 and the 38.2% Fibonacci. Daily closes below it would pause the upside bias, but strong catalyst would be needed for bigger losses that would challenge 1.0581.

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Nikos Tzabouras

Senior Financial Editorial Writer

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

1

Retrieved 15 Dec 2023 https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20231213.pdf

2

Retrieved 15 Dec 2023 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html

3

Retrieved 19 Apr 2024 https://www.ecb.europa.eu/press/pressconf/2023/html/ecb.is231214~df8627de60.en.html

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