ECB Holds Policy, Euro Faces Uncertainty

The European Central Bank (ECB) is unlikely to reassess its policy outlook until spring, and expectations for an interest rate cut in March or April are premature, according to ECB policymaker Bostjan Vasle, the governor of Slovenia's central bank. Despite market pressure following the U.S. Federal Reserve's signaling of rate cuts, Vasle argued that financing conditions may no longer be restrictive enough.

Market speculation currently suggests a 50-50 chance of a rate cut in March, with a fully priced-in cut by April and more anticipated by June. While inflation is expected to rise after bottoming out at 2.4%, uncertainties exist around wages as workers seek compensation for previous high inflation impacts. Surprisingly, the labor market remains tight despite the bloc's proximity to recession, with firms holding onto labor in anticipation of a rebound.

In response to rising concerns about bad loans, the ECB announced increased capital requirements for 20 banks, emphasizing the need for preparedness in the face of potential delinquencies and tighter liquidity. The move is part of the ECB's ongoing efforts to address economic challenges and risks in the banking sector.

The euro zone's trade balance turned from a deficit to a surplus in October, driven by reduced energy imports. The surplus in manufacturing goods for the European Union as a whole doubled in Jan-Oct 2023, with machinery, including vehicles, being a major contributor. The trade deficit with Russia sharply decreased, while deficits with China narrowed and the surplus with the United States expanded.

Euro zone business activity declined further in December, indicating that the region is likely in a recession. The Purchasing Managers' Index (PMI) for December suggests economic contraction for two consecutive quarters, meeting the technical definition of a recession. The European Central Bank revised its growth forecasts for 2023 and 2024 downward.

Germany's 2023 supplementary budget was approved after the suspension of a self-imposed cap on borrowing due to a constitutional court ruling. The government justified this move by citing the war in Ukraine as an emergency situation, resulting in increased borrowing exceeding permitted levels. The budget includes funds for energy price subsidies and relief for flood-affected areas. Germany's economic downturn worsened in December, with both manufacturing and services contracting. Business morale also declined unexpectedly, reflecting challenges in the country's economic outlook.

French economic activity is expected to pick up in 2025 due to lower inflation, falling short of government growth expectations in the meantime. The Bank of France revised its 2023 growth forecast down to 0.8%, with weak third-quarter data contributing to the adjustment.

German Finance Minister Christian Lindner and his French counterpart Bruno Le Maire will meet to discuss EU fiscal rule reform, with differences between Paris and Berlin on issues such as investment sustainment and debt reduction pacing. The European Stability and Growth Pact, governing government debt and deficits, remains a focal point for negotiations.

In the foreign exchange market, expectations of U.S. interest rate cuts in the coming year continued to weigh on the dollar's broader performance. The Federal Reserve's potential rate cuts, despite officials pushing back against market expectations, have contributed to a decline in the U.S. dollar against most major currencies.

Meanwhile, U.S. single-family homebuilding reached a 1.5-year high in November, with declining mortgage rates and incentives driving potential buyers back into the housing market. Economists anticipate that the housing market will support GDP growth in the fourth quarter and help the economy avoid a recession next year. As a result, it could impact the euro's value. While there might be increased trading within the higher range in the near future, the anticipated upward movement is expected to be constrained over the medium term.

Data for Technical Analysis (1H) CFD EUR/USD

Resistance : 1.0973, 1.0975, 1.0978

Support : 1.0969, 1.0967, 1.0964

1H Outlook  

Source: Investing.com

Buy/Long 1 If the support at the price range 1.0964 - 1.0969 is touched, but the support at 1.0969 cannot be broken, the TP may be set around 1.0974 and the SL around 1.0962, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0973 - 1.0978, TP may be set around 1.0984 and SL around 1.0967, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0973 - 1.0978 is touched, but the resistance at 1.0973 cannot be broken, the TP may be set around 1.0967 and the SL around 1.0980, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0964 - 1.0969, TP may be set around 1.0958 and SL around 1.0975, or up to the risk appetite.       

Pivot Points Dec 20, 2023 02:58AM GMT

Sources: Investing 1, Investing 2