EUR/USD analysis: ECB day arrives with US GDP also in focus

• EUR/USD analysis: What to expect from ECB and Lagarde?
• Dollar also in focus with US GDP release ahead of Core PCE on Friday

The EUR/USD was a touch higher this morning, adding to its gains from the day before. Investors are looking forward to the ECB rate decision, as well as a slew of US data including GDP ahead of next week’s Fed meeting.

EUR/USD analysis: Don’t expect any fireworks from ECB and Lagarde

Recent data releases have remained soft in the Eurozone, as was again indicated by Wednesday’s release of the latest PMI data. So, the European Central Bank (ECB) is likely to acknowledge that the current state of the Eurozone economy, with growth hovering around zero, is not great. However, it will probably highlight more forcefully signs suggesting that inflation is not making swift progress towards their 2% target, particularly in light of the persistent pressure on wages. The ongoing Red Sea situation has introduced a new complicating factor, with rising shipping costs expected to amplify input costs. This, in turn, is poised to contribute to a surge in global inflation, thereby causing a further delay in the implementation of interest rate cuts. Given these circumstances, the prospect of a rate cut before June appears highly unlikely.

In fact, ahead the blackout period of the ECB, we heard from several officials of the Governing Council who opposed the notion of early rate cuts. ECB President Christine Lagarde has suggested that the reduction in borrowing costs might be postponed until the summer instead of the spring, a stance consistent with concerns expressed by other ECB officials regarding wage inflation. It is unlikely that she will say something materially different today at the ECB press conference. The greater the caution and resistance the ECB exhibits toward implementing rate cuts, the more probable it becomes for the EUR to find support.

Dollar also in focus with US GDP release

After rising on Tuesday, the Dollar Index fell on Wednesday and was trading lower at the time of writing in the early European session. The weakness in USD over the past couple of days has been driven in part because of renewed gains in global stock markets amid tech and A.I. optimism and news that China is cutting the reserve requirement ratio for banks within two weeks, with Beijin also hinting at more support measures to come. As a result, we have seen risk-sensitive commodity dollars rise in favour of the greenback.

Still, the dollar remains near its highs of the year and could print a new high for 2024 in the event of more data surprises.  In December, investors were expecting the Fed to cut interest rates in 2024 sooner than it had planned. This year, those expectations have been pushed back thanks to strong data and hawkish Fed commentary. Consequently, the greenback has risen alongside yields. A few weeks back, everyone thought a rate cut in March was a sure thing. Now, it's a toss-up, according to the CME's FedWatch tool.

The hawkish repricing is due to consistently stronger data. Wednesday saw the Composite PMI of the manufacturing and services sector rise to its highest level since June. Retail sales, jobless claims, UoM’s consumer confidence are among several other US data releases that have beaten expectations lately. If GDP data shows continued strength in the US economy, expectations for an imminent interest rate reduction will be pushed back further. Growth is seen easing to 2.0% on annual format in Q4 from 4.9% in Q3.

The Fed’s favourite inflation measure, the core PCE price index, is due for release on Friday. This is expected to show a month-on-month increase of 0.2%, up from 0.1% the previous month. We have already heard hawkish talk from several Fed officials. In fact, even the centrist Raphael Bostic was a bit more hawkish than expected, mirroring several other of his FOMC colleagues who have spoken lately. The Fed might provide a more hawkish policy decision next week than it conveyed in December.

EUR/USD analysis video

EUR/USD analysis: Key levels to watch ahead of ECB, US GDP

Source: TradingView.com

The EUR/USD was maintaining its position slightly ahead of the 200-day moving average support, at the time of writing. Let’s see if the upcoming ECB rate decision and significant US data will trigger a sharp move. They certainly have the potential to bring more definitive movements to the single currency. However, the overall sentiment gleaned from the EUR/USD chart suggests a lack of strong commitment from both bullish and bearish forces, rendering it an ideal currency pair for range trading.

A daily closure below the 200-day average, approximately at 1.0845, would satisfy the bearish outlook. In such a scenario, we may witness subsequent technical selling pushing the pair towards 1.0800 and potentially descending to the low observed in December at 1.0723.

Conversely, the bulls will be keen on achieving a closure above the breached trend line, creating a pathway towards the 1.10 handle and possibly extending further. A rise above 1.0950 could trigger such a move.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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