Euro's Volatility Amid Gloomy Economic Indicators and Inflation Concerns

The foreign exchange market witnessed significant fluctuations, with the Euro initially strengthening against the US dollar before retreating following the release of higher-than-expected US inflation data.

European Central Bank (ECB) policymakers acknowledged on Wednesday that the euro zone might have been in recession in the last quarter, and near-term prospects remain weak. The euro zone's growth has hovered around zero for most of 2023, with a modest pickup anticipated this year, helping to alleviate inflation pressures.

Data from earlier this week revealed a decline in industrial output in the Czech Republic and Hungary, following a similar trend in Germany, the region's major economy and a key trading partner. The risk to central Europe's recovery is evident, even as central banks in the region begin to scale back rate hikes.

German economic indicators paint a bleak picture, as industrial production unexpectedly fell in November for the sixth consecutive month. The Purchasing Managers' Index for manufacturing in Germany suggests a continued contraction, pointing to a larger decline of 2% in the fourth quarter. This industrial weakness is impacting Central and Eastern European (CEE) economies, particularly in the German auto sector-linked countries like Hungary and the Czech Republic.

Germany's construction sector is facing a grim outlook for 2024, with spending expected to decline for the first time since the financial crisis. Retail sales in Germany also fell more than expected in November, contributing to a challenging economic environment.

However, not all sectors in Germany are experiencing a downturn. The IT and telecommunication sector is anticipated to outperform the overall economy, as per a study by German digital association Bitkom. Nevertheless, the projected growth for this sector is slower compared to other countries like India, the US, and China.

S&P sees economic growth in central Europe surpassing that of the euro zone in the coming year, driven by a rebound in domestic demand as real wages recover from last year's steep falls caused by double-digit inflation.

ECB President Christine Lagarde expressed optimism that the worst may be over regarding inflation and hinted at possible interest rate cuts if inflation falls to the 2% level. The ECB expects inflation to fluctuate between 2.5% and 3% for much of the year. Investors, however, have already priced in at least five rate cuts in 2024, with the first expected in March or April.

In the US, the dollar held steady as higher-than-expected consumer price inflation data raised doubts about an imminent rate cut by the Federal Reserve. The headline US Consumer Price Index (CPI) accelerated in December, reaching 3.4% year-on-year, while the core measure, excluding volatile items, slowed marginally to 3.9%.

Alongside inflation, the labor market in the US remains a key focus for economists, with ongoing strength seen as supportive of the Federal Reserve's efforts to engineer a soft landing for the economy. Initial jobless claims showed a slight decrease, and the four-week average remained relatively stable. Despite the inflation concerns, some Fed officials, including Cleveland Fed President Loretta Mester, believe it might be too soon to consider a policy rate cut in March based on the latest CPI figures. Consequently, the euro might experience fluctuations within a limited range throughout this period, with a tendency to remain consistently weaker than the US dollar.

Data for Technical Analysis (5H) CFD EUR/USD

Resistance : 1.0984, 1.0988, 1.0993

Support : 1.0972, 1.0968, 1.0963

5H Outlook 

Source: Investing.com

Buy/Long 1 If the support at the price range 1.0962 - 1.0972 is touched, but the support at 1.0972 cannot be broken, the TP may be set around 1.0986 and the SL around 1.0957, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0984 - 1.0994, TP may be set around 1.1001 and SL around 1.0967, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0984 - 1.0994 is touched, but the resistance at 1.0984 cannot be broken, the TP may be set around 1.0971 and the SL around 1.0999, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0962 - 1.0972, TP may be set around 1.0955 and SL around 1.0989, or up to the risk appetite.       

Pivot Points Jan 12, 2024 04:25AM GMT

Sources: Investing 1, Investing 2