Euro-Dollar Threatening Fresh Downside Break: Forex.com

EUR/USD is trading at fresh 2024 lows as traders increase their bets on ECB interest rate cuts beginning within three months.

As the chart below shows, the world’s most widely-traded currency pair is testing a key support level near 1.0800, where the 200-day EMA and 50% Fibonacci retracement of the Q4 rally converge.

Another technical consideration is that we’re approaching the end of the month, and after a strong rally in US equity markets relative to their international rivals, global asset managers are likely to rebalance by selling the US dollar.

This short-term effect could depress the greenback and boost EUR/USD over the next 48 hours.

Beyond that, the tone of Wednesday’s FOMC meeting (especially Fed Chairman Powell’s outlook for interest rates in March) and Friday’s Non-Farm Payrolls report will go a long way toward determining the next move in EUR/USD.

If Powell hints that the Fed could remain on hold in March and job growth continues to beat expectations, EUR/USD could break support in the 1.0800 area and test the December low near 1.0725 as soon as next week.

It’s been a quiet start to the week in terms of traditional economic data, but that doesn’t mean there’s nothing new for traders to digest.

In addition to ongoing violence in the Middle East, traders were also treated to a seemingly coordinated series of speeches from ECB officials endorsing interest rate cuts…but not until this summer.

Below, we highlight representative quotes from speeches by three high-ranking ECB policymakers on Monday:

1. ECB Vice President de Guindos: “We have seen good news on inflation recently and sooner or later this will be reflected in our monetary policy…inflation risks are to the downside”
2. ECB Member Centeno: “The ECB should start cutting rates sooner rather than later…no need to wait for first quarter wage data in May to make rate decisions”
3. ECB Member Kažimír: “Rate cut is within reach…a cut in June is more probable than in April” (See our coverage noting Kazimir explicitly acknowledges April is a possibility).

As you can see, there appears to be a growing consensus around cutting interest rates at the ECB, but policymakers don’t appear to be in any hurry to start the process, at least publicly.

However, traders are reading between the lines of this shift and have fully discounted an interest rate cut in April, despite the central bank’s protestations.

As with the Fed and other major central banks, a key theme over the next couple of months (if not all of 2024!) will be whether the market’s more aggressive expectations for interest rate cuts are more accurate or whether central banks’ conservative plans will ultimately be realised.