- Market awaiting inflation data to start reasoning with greater certainty about the Fed’s monetary policy change in 2024. Inflation slightly up, but markets convinced of an imminent rate cut.
- Macro data confirming the economic slowdown in the Eurozone and the prospect of a significant interest rate cut by the ECB. Lagarde confirms we are close to the “cut” moment.
- EurUsd continues to hover just below key resistance levels to witness a more convincing rally in the coming months. The hurdle remains at 1.10/1.12.
2024 starts with Market Uncertainty Amidst Inflation and Economic Divergence
The year 2024 kicked off under a cloud of uncertainty for stock and currency markets. Excessive optimism about a quick inflation retreat (and hence a Fed rate cut) was dampened by recent U.S. labor market data, followed by the eagerly awaited December inflation figures. The general inflation rate was expected to rise slightly to 3.2%, with the core rate projected to drop to 3.8%. However, consumer prices climbed higher than anticipated, reaching 3.4% and 3.9%, respectively.
The market now awaits the Federal Reserve’s initial commentary to better understand the direction of interest rates, which have stopped their decline in the 4% range for ten-year maturities. Adding to this is the media buzz slowly building up in America ahead of the November elections, where “the two old guards,” Trump and Biden, appear to be the designated rivals. Moreover, the geopolitical landscape seems increasingly unstable.
In Europe, meanwhile, macroeconomic data confirm a cyclical slowdown. Retail sales fell by 0.3% in November. German factory orders shrank by 4.4%, and industrial production in November also weakened, dropping by 0.7%. The market expects a first rate cut in April, followed by six more monetary policy moves by the end of 2024. Lagarde has confirmed that inflation is returning towards the 2% target as forecasted, indicating a shift in monetary policy.
The economic divergence between America and Europe is widening, yet the euro remains resilient. It’s important to remember that this year’s critical European Parliament elections could shift the continent’s economic policy further to the right, according to polls.
Technical Analysis: Critical Support and Resistance Dynamics as 2025 Looms
There are no major developments on the EurUsd front, with the market positioning just above significant support levels at 1.085, but not far from resistance areas around 1.11/1.12, beyond which important bullish signals for the euro could be triggered. It seems the market still needs to digest some long euro and short dollar positions before decisively moving upwards. Anticipation is high for the initial statements from central banks. Lagarde appears to have put a stop to the euro’s rise.
The following chart is quite intriguing, suggesting a significant cyclical event for EurUsd in 2025 when either a peak or a trough will emerge. It’s too early to tell, but if resistance levels around 1.18 are reached next year (where two rising legs from the 0.95 lows are equal in length and also coincide with a long-term downtrend line transition zone at 1.16), it would present a tremendous opportunity to go long on the U.S. dollar.
Conversely, we could witness a sharp decline in the exchange rate towards supports below parity in the coming months, suggesting that 2025’s event may not be a peak, but rather a cyclical low, warranting a reverse strategy.