EUR/USD keeps the weekly range bound theme unchanged and now breaks below the key 1.0700 support on Friday.
- EUR/USD resumes the downside following Thursday’s decent uptick.
- A deeper decline could see the monthly low near 1.0670 retested.
- The United States will publish the January Consumer Price Index next Tuesday.
- Euro Zone Gross Domestic Product could be a make-it-or-break-it for the Euro.
- EUR/USD bearish path could extend towards a long-term Fibonacci support at 1.0510.
In case losses gather extra impulse, then the pair could rapidly challenge the so far February low at 1.0669 (February 7). The loss of the latter could pave the way for further retracement to the 2023 low at 1.0481 (January 6).
In the longer run, the constructive view remains unchanged while above the 200-day SMA, today at 1.0321.
The EUR/USD pair fell for a second consecutive week, further retreating from the 1.1000 region to settle around the 1.0700 figure. The US Dollar gained the most ground on Monday, mounted on the central banks’ frenzy and the outstanding United States Nonfarm Payroll report.
The US Federal Reserve (Fed) has slowed the pace of tightening and delivered a 25 basis point (bps) rate hike, but refrained from anticipating a pause in hikes while down-talking the chances for a rate cut, something market participants have been betting on since late 2022.
Federal Reserve between a rock and a hard place
The Fed has long remarked that it is willing to tame inflation at the expense of economic growth. Fears of a recession dominated financial markets through 2022. The latest outstanding job report indicated that the labour market remains tight regardless of the Fed’s aggressive monetary policy. On the one hand, it means that the resilience of the economy is much higher than expected. Yet at the same time, a tight labor market tends to boost inflation, making Fed’s battle against price pressures more difficult.
At this point, Federal Reserve officials think rate cuts would not be necessary this year, although market players believe otherwise. The latest meeting minutes clearly stated that additional interest rate hikes in the coming months would be “appropriate,” with Chair Jerome Powell & co repeating it ad-exhaustion.
However, Chief Powell’s acknowledgement that the disinflationary process has already begun has led investors to believe in a monetary policy pivot. Powell participated on Tuesday in a moderated discussion at the Economic Club of Washington DC and repeated his moderated speech. Powell started restating they would probably need to do further interest-rate increases adding that the process is going to be “bumpy,” and that stronger-than-anticipated data would see the Fed raising rates accordingly. He also said that solid labor market reports or higher inflation reports would result in the Fed raising rates by more than what is currently priced in.
Powell’s words triggered volatile movements, but in the end, his hawkish message undermined demand for high-yielding assets to the benefit of the US Dollar.
European Central Bank sticks to its plan
Across the pond, mixed European data and the absence of fresh monetary policy clues made the Euro an unattractive asset. The Eurozone economic setback continues and would keep the European Central Bank (ECB) on the tightening path for longer than anticipated. Following the latest ECB meeting, President Christine Lagarde said that March would bring another 50 bps rate hike, while it would be a meeting-by-meeting data-dependant decision afterwards.
EU policymakers have spent the last few days cooling expectations for a steep recession, in line with Mme Lagarde’s words of a possible “shallow and sort-lived” economic setback. However, most macroeconomic figures released these days point in the opposite direction.
In the EU Retail Sales fell by 2.8% in January, while German Factory Orders plunged by 10.1% YoY in December. Additionally, the country’s Industrial Production in the same month declined at an annualised pace of 3.9%. On a positive note, the German Harmonized Index of Consumer Prices (HICP) unexpectedly rose by 9.2% YoY in January, below the 10% expected and easing from the previous 9.6%. Easing inflationary pressures are welcomed news but mean the ECB has room to decelerate the pace of tightening.
As central banks hint they would move against speculative interest beliefs, uncertainty increases, leading to risk-averse markets.
European GDP and US CPI on the docket
Fresh clues on economic developments will be available next week. On Tuesday, the Eurozone will release the preliminary estimate of the 2022 Q4 Gross Domestic Product. The economy grew at an annualized pace of 1.9% in the third quarter and a modest 0.1% in the three months to September. Later on the same day, the United States will publish the January Consumer Price Index (CPI), foreseen up by 5.8% YoY. The core reading, excluding volatile food and energy prices, is expected at 5.3%. Such figures will confirm inflation keeps receding and revive speculation of a Fed’s pivot.
On Wednesday, the United States will release January Retail Sales, foreseen advancing 0.1% after a 1.1% drop in the previous month. Other than that, market participants will be keeping an eye on policymakers’ speeches, although it seems unlikely they will come out with surprise stances.
