Neither the ECB’s optimism about the eurozone economy nor the slowdown in US inflation has forced the markets to change their stance. They expect the Fed to keep rates unchanged until March, implying that the US dollar may strengthen. Let’s discuss this topic and make a trading plan for the EUR/USD pair.
The article covers the following subjects:
Major Takeaways
- US inflation is slowing down.
- The ECB has raised its GDP forecasts for the eurozone.
- Investors are tired of the divergence.
- Long positions on the EUR/USD pair can be opened on a rebound from 1.17, 1.168, and 1.164.
Weekly Euro Fundamental Forecast
Markets are tired of selling the US dollar. They perceive soft US economic data as noise that should be ignored. Christine Lagarde’s optimism about the eurozone economy, along with the ECB’s upward revisions to its forecasts, is not fuelling the EUR/USD rally. There is too much negative sentiment surrounding the greenback. Against this backdrop, the US currency may rise only to plummet again.
The slowdown in US consumer price growth to 2.7% and core inflation to a more than four-year low of 2.6% came out of the blue. Investors were prepared to sell the EUR/USD pair on data close to forecasts, but ended up buying it instead. However, bulls failed to sustain the upward movement. The market did not take the November BLS report at face value, as there were too many omissions.
US Inflation Change
Source: Wall Street Journal.
The ECB failed to help the euro. The upward revision of eurozone GDP forecasts is, of course, good news. However, Christine Lagarde had announced this move by the central bank. At the same time, the postponement of the return of inflation to the 2% target until 2028 gave pause for thought. If consumer prices fall short of the target in 2026–2027, why not cut rates, especially given that Lagarde noted that trade risks would continue to weigh on the currency bloc’s economy?
Luckily for the euro, a Bloomberg report confirmed rumors that the monetary expansion cycle was coming to an end. Unless there is a serious shock, the deposit rate will remain at 2%. Discussions about raising it are considered premature. This approach is in line with recent forecasts by Bloomberg analysts. They believe that there will be no changes in the ECB’s monetary policy until 2027.
ECB Forecasts for Eurozone Inflation and GDP
Source: Bloomberg.
The reaction of the EUR/USD rate to US inflation statistics for November and the results of the European Central Bank meeting suggests a degree of investor fatigue. The issue of divergence in the monetary policies of the ECB and the Fed has become a tiresome topic. It is evident where the major currency pair will move in the long term. However, while the Fed is halting its rate hikes, traders may lock in profits on long positions and keep a close eye on the US dollar.
In fact, the latest US inflation data has slightly increased the likelihood that the Federal Reserve will ease monetary policy. The January figure remained unchanged at 24%, while the March figure increased from 54% to 58%. Evidently, a pause seems to be inevitable. The central bank will await new data. Traders may pause selling the US dollar.
Weekly EURUSD Trading Plan
Against this backdrop, short positions on the EUR/USD pair formed below 1.1735 can be maintained in the short term. A rebound from support levels of 1.17, 1.1680, and 1.164 could provide grounds to take profits and return to buying the main currency pair.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURUSD in real time mode
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