- The euro's exchange rates declined against the rest of the other major currencies after the release of inflation data in the euro zone, which confirmed the market's bets on several interest rate cuts by the European Central Bank (ECB) in 2024.
- As a result, the gains of the euro/dollar pair evaporated, with such losses that reached the support level of 1.0828, before settling in a bearish close around the level of 1.0883, after reaching the resistance level of 1.1016, its highest level in three months.
- Significantly, the price of the euro fell after the European statistics office Eurostat said that inflation in the euro zone fell to 2.4% on an annual basis in November, from 2.09% in October, making only a few points away from the European Central Bank’s target of 2.0%.
What is expected for the euro price in the coming days?
In this regard, Rafi Boyadjian, chief investment analyst at XM.com, says: “The euro retreated from its highest levels in three and a half months against the US dollar, as weaker-than-expected CPI numbers from the euro zone put pressure on the single currency.” In general, the euro may remain in a weak position if the results of the economic data of the countries of the bloc continue with weaker German leadership and if the European Central Bank abandons its tightening tone.
However, ECB President Christine Lagarde and other members of the Governing Council are more concerned with core inflation, arguing that it will fall more slowly and means it will take some time before inflation falls to the 2.0% target on a sustainable basis. But that argument will look a little weaker today after Eurostat said core Eurozone CPI fell by 0.5% m/m in November from +0.1% in October. Core CPI rose 3.6% year-on-year, but this was well below the 3.9% that markets had expected and down sharply from October's reading of 4.2%.
Obviously, this repricing is reflected in the EUR/USD exchange rate falling to 1.09, half a percent lower than it started on Thursday. Accordingly, analysts say, “The data reinforced expectations that the European Central Bank will begin cutting interest rates sooner rather than later, as the latest market prices indicate that the Europeans may outperform the Federal Reserve with the first interest rate cut of the session.”
Eurozone inflation is now tracking at 2.65% in the fourth quarter, well below the average estimate of 3.3% set out in the European Central Bank's forecasts released in September. At the same time, some analysts warn that rushing into bets on lowering interest rates would be a mistake. The European Central Bank is very concerned about the tight labor market, which implies cutting interest rates later rather than sooner. In fact, HSBC said last week that the ECB would not cut interest rates until 2025, with wage adjustments likely to continue at levels inconsistent with inflation falling to 2.0% on a sustainable basis anytime soon.
Furthermore, it is likely that the market will be at odds with the European Central Bank regarding the timing of the first interest rate cut. However, if the ECB prevails and interest rate cuts are not implemented until late 2024, at the earliest, the euro price could recover as expectations are revised.
For its part, Commerzbank is looking forward to stabilizing core inflation well above the European Central Bank's target of 2% by the second half of 2024. According to his speech, “As a result, we believe that it is too early to talk about victory over inflation.” Adding, “We still believe that the European Central Bank will not do that.” Start cutting key interest rates until the end of 2024.”
EUR/USD Analysis Today:
The exchange rate of the EUR/USD has declined across the ascending trend line and is now on its way to testing the psychological support of 1.0800. Nearby, strengthens the bears’ control again, and thus portends a broader downward movement if the US jobs numbers this week come in support of the path of tightening the US Federal Reserve’s policy. Currently, the 100 SMA is below the 200 SMA to indicate that the overall trend has turned bearish or there is a chance that the strength of the downtrend will resume. An important and exciting trading week, Caution must be exercised. Meanwhile, the Euro/Dollar price may remain under downward pressure until the reaction to the results of the US Labor market determines the next direction of further decline or improvement. As we mentioned before, the psychological resistance of 1.1000 will remain an important barrier for bulls’ strong and continuous control over the direction of the currency pair.
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