Ahead of the FED and ECB meetings, EURUSD is ranging between the 50 and 200-day moving averages. After the Eurozone CPI came in significantly below expectations, momentum appears to be shifting in favor of the dollar. Subsequently, the US reported a robust employment figure, and yesterday’s CPI release was nearly as expected, indicating that the US economy remains strong. Today and tomorrow will be crucial for the next wave in EURUSD.
During the FOMC meeting today, members are expected to maintain the current interest rates. The peak in rates seems to have been reached, and moving forward, the focus will shift to potential rate cuts, with questions arising about when and how fast these cuts might occur. Economic forecasts from FOMC members will be closely scrutinized today, with a likely upward revision for 2023 GDP. After several quarters of above-average GDP data, the US might start feeling the impact of higher rates in 2024. Any changes to the 2024 GDP and inflation forecasts will provide crucial insights for market participants. The dot plot, as usual, will be under the spotlight, with one more hike expected for this year, but it will most likely be written off. The current 2024 forecast shows only one cut, but members might increase expectations to two or three, which could be perceived as dovish by the markets if it will be three. Futures and swap markets have already priced in four cuts. During the press conference, Powell is likely to maintain a relatively hawkish tone, signaling another hike if inflation persists and reiterating that rates will remain high for a while.
Regarding the ECB, the focus will be on the PEPP (Pandemic Emergency Purchase Programme). Some members have already discussed stopping PEPP reinvestments earlier than the planned date at the end of 2024. Members might further discuss PEPP or agree to discuss it at the January meeting. Lagarde is likely to maintain a somewhat hawkish stance during the press conference, but concerns about rapidly slowing inflation and core inflation may limit the hawkishness to some degree. The ECB’s forecasts for 2024 inflation, following the weak data, and 2024 GDP, after the weak growth numbers, will also be closely watched.
(EURUSD Daily Chart)
In 2023, EURUSD remained range-bound, fluctuating between the 1.10-1.11 zone at the top and 1.048 at the bottom. Each time the Relative Momentum Index (RMI) signaled a downtrend in the last three instances, EURUSD shifted its trend southward, breaking the 50-day moving average and experiencing a decline lasting at least a couple of weeks. Presently, the RMI has issued a sell signal, and EURUSD is currently testing the 50-day moving average. The weak EU economic indicators are exacerbating downward pressures. Depending on the decisions and forecasts of the Federal Reserve (FED) and the European Central Bank (ECB) in the next two days, EURUSD may either break the SMA and follow the typical downward pattern once again or rise above the 200-day moving average, aided by positive seasonality (refer to the monthly report for more details), redirecting its trajectory towards the 1.10-1.11 zone.
