Amid speculations that the latest increase in interest rates from the European Central Bank will be the end of the tightening cycle, the euro did not benefit from the decision. The suffering of the euro currency pair against the US dollar increased, which fell to the lowest support level of 1.0631 in six months. It closed last week's trading stable around the level of 1.0660. This bearish performance will be on an important and exciting date where the American central bank will announce the update of its monetary policy.
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For its part, the European Central Bank raised interest rates to record levels last Thursday but said that this is probably the final increase and that it now intends to maintain the current levels for a long period of pause. The 10th rise of the cycle was accompanied by a reduction in growth expectations but higher inflation expectations for 2023 and 2024 and the obligation to monitor the data when considering whether to raise interest rates again or not. The European Central Bank added in a statement: "The main interest rates of the European Central Bank have reached levels that, if maintained for a long enough period, would make a significant contribution to the timely return of inflation to the target."
Despite the commitment to keep interest rates at current levels for a "sufficient" period, the market has been primed for interest rate cuts in 2024, pushing eurozone bond yields lower and sending the euro down alongside.
Commenting on what happened, Mathias van der Jugt, an analyst at KBC Capital Markets, says: "Although the statement clearly states that interest rates are desired at a high enough level for a long enough time, it immediately sparked speculation in the market About the timing of the first interest rate cut. Accordingly, the German treasury bonds strengthened after the decision as a result, even if it was not so "yields lose between 1.6 to 6.7 basis points with the upper part of the curve prevailing. And the euro will fall." And for his part, Swedbank analyst Nerijos Makiolis says: "We maintain our expectations that the European Central Bank will start lowering interest rates as soon as April 2024, that is, sooner than the markets currently expect."
Interest rate cuts will become more likely if the Eurozone economy slows down more. The analysts point out that the purchasing managers' indicators and the main indicators currently indicate the continuation of the weakness in demand, which will significantly reduce the pricing power of the business and may even lead to a reduction in the profit margin.
Currencies tend to fall once their respective central banks have sent an unequivocal signal that they have reached the peak of the tightening cycle, prompting investors to grow confident enough to introduce the timing of a rate cut. A clear example of this is the New Zealand dollar which has underperformed its peers since the Reserve Bank of New Zealand sent a clear signal that it was hitting the pause button on the tightening cycle, despite being among the earliest and most aggressive hikers.
On the other hand, the American Federal Reserve Bank has temporarily suspended the cycle of raising interest rates but maintained its guidance that it is ready to raise interest rates again, thus maintaining interest rate cut expectations. The European Central Bank appears to be leaning towards the Reserve Bank of New Zealand model, which could lead to further weakness in the eurozone currency.
Expectations of the euro against the dollar today:
- According to the performance on today's chart below, the general trend of the EUR/USD currency pair is downward.
- This is taking into account that its recent losses have moved the technical indicators towards strong sell saturation levels.
- I still expect the downward momentum to continue until the markets react to this week's important events led by the announcement of decisions of the policy of the American central bank and then the readings of the purchasing managers' indicators for the manufacturing and service sectors for the Eurozone economies.
According to the general downward trend, the nearest targets of the bears are the support levels 1.0600, 1.0550 and 1.0480, respectively, and from the second and last level, it is best to return to buying the currency pair with no risk. On the other hand, there will be no first break in the downward direction without first moving towards the resistance level 1.0825.
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