EUR/USD Tests Critical Support on ECB Peak Rates Prospects

  • EURUSD
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EUR/USD Analysis

The pair comes from its best month of the year, during which it reached the highest levels since summer, as recent data from the US raise the bar for further tightening by the Fed, harming the greenback. In the latest important release, PCE inflation eased to 3.5% y/y and the lowest in more than two years. Furthermore, markets perceived last week's speech by Chair Powell as dovish and according to CME's FedWatch Tool, they anticipate 125 basis points of cuts next year, starting in March. [1]

On the other side of the Atlantic, its European counterpart struggled to contain price pressures, but the latest data show fast progress. The Consumer Price Index decelerated to 2.4% y/y in November according to preliminary data, in the slowest increase in two years. ECB voter and hawk Ms Schnabel spoke of "remarkable" progress in today's interview with Reuters. Furthermore, she hinted at peak rates, saying that the latest data have made further rate hikes "rather unlikely". [2]

EUR/USD pulls back this month, as Eurozone inflation is lower and closer to the 2% target compared to the US, with the economy in bad shape. This creates a more compelling case for the ECB to refrain from further tightening and to cut rates before its US peer. The Fed has adopted a softer stance and may have already done enough to restore price stability. However, inflation is still high, the labor market is tight, the economy outperforms and Chair Powell warned of more hikes if necessary. [3]

EUR/USD faces pressure today after Ms Schnabel's remarks, retesting the critical 38.2% Fibonacci of its recent relief-rally and the EMA200. Daily closes below it could send it into the daily Ichimoku Cloud (starting at around 1.0700), but the 2023 lows are distant (1.0447).

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On the other hand, market hopes for a Fed pivot can help contain the pullback. Moreover, the RSI points to overbought conditions and above the aforementioned key support area, EUR/USD has the ability to push for higher highs (1.1017). The next leg of the move will depend on the outcome of Friday's US jobs report.

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

2

Retrieved 05 Dec 2023 https://www.ecb.europa.eu/press/inter/date/2023/html/ecb.in231205~3ba2bbfcfc.en.html

3

Retrieved 04 Mar 2024 https://www.federalreserve.gov/newsevents/speech/powell20231201a.htm

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