ECB Maintains Key Rate; US Dollar Strengthens on Surprising Economic Growth

The European Central Bank (ECB) maintained its key interest rate at a record-high of 4% during its recent policy meeting, signaling a commitment to combating inflation. The decision was accompanied by ECB President Christine Lagarde's assertion that it was premature to discuss rate cuts for the euro zone economy. The euro dipped to a six-week low against the dollar following Lagarde's mixed comments.

The euro zone likely experienced a recession in the last quarter, with the current quarter marking the sixth consecutive period of flat or negative growth. The ECB anticipates a recovery driven by household and government spending, but data suggests a bleaker outlook, with manufacturing in recession and services cooling. Lagarde highlighted downside risks, including the impact of monetary policy, geopolitical tensions like wars in Ukraine and the Middle East, and the potential global economic downturn. Additionally, disruptions to trade from Yemen's Houthi group attacks in the Red Sea could contribute to inflation by raising energy and freight costs.

Amidst these challenges, ECB policymakers are reportedly open to changing their rhetoric in the next meeting, potentially paving the way for an interest rate cut in June, provided upcoming data confirms inflation reduction. Money markets currently indicate an 80% chance of a 25 basis points rate cut in April and fully factor in 50 basis points of cuts by June.

The European Commission unveiled plans to enhance the EU's economic security by scrutinizing foreign investments more closely and implementing coordinated controls on exports and technology outflows, particularly concerning China. The proposed revisions to foreign direct investment screening aim to block investments posing security risks within the EU or if controlled by a foreign company. This initiative, responding to COVID, Russia's invasion of Ukraine, cyber attacks, and geopolitical tensions, is part of a broader strategy to reduce economic reliance on China.

German companies operating in China are facing challenges, with a survey indicating that the proportion considering exiting or already exiting the Chinese market has doubled in the past four years. This trend aligns with Germany's strategy to de-risk economic ties with China, reflecting concerns about geopolitical risks and China's assertive behavior.

Germany's economic outlook has been downgraded, with the Ifo institute now predicting a growth rate of 0.7% in 2024, down from the earlier forecast of 0.9%. The November constitutional court decision necessitated changes to the federal budget, contributing to economic uncertainty. Germany's economic downturn intensified in January, impacting both manufacturing and services.

In the United States, the dollar strengthened after data revealed faster-than-expected economic growth in the fourth quarter. The U.S. economy expanded at a 3.3% annualized rate, surpassing the consensus forecast of 2%. Treasury Secretary Janet Yellen expressed optimism about the robust economic growth, highlighting productivity gains without inflationary pressures.

Despite the strong economic performance, the U.S. rate futures market priced in a 51% chance of easing at the March meeting, indicating some expectations of a rate cut. The first rate cut is fully priced in for the May meeting, with a 94% probability. Economists polled by Reuters suggest that the Fed might wait until the second quarter, with June being the likely month for a rate cut. The upcoming Fed meeting will be closely watched for signals on the central bank's stance regarding interest rates. Hence, there is an anticipation that the euro will face continued downward pressure in this timeframe, primarily stemming from variations in economic performance and yield differentials between the two economies.

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

Resistance : 1.0852, 1.0859, 1.0871

Support : 1.0828, 1.0821, 1.0809

5H Outlook

Source: Investing.com 

Buy/Long 1 If the support at the price range 1.0818 - 1.0828 is touched, but the support at 1.0828 cannot be broken, the TP may be set around 1.0859 and the SL around 1.0813, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.0852 - 1.0862, TP may be set around 1.0885 and SL around 1.0823, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.0852 - 1.0862 is touched, but the resistance at 1.0852 cannot be broken, the TP may be set around 1.0828 and the SL around 1.0867, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.0818 - 1.0828, TP may be set around 1.0800 and SL around 1.0857, or up to the risk appetite.       

Pivot Points Jan 26, 2024 02:35AM GMT