EurUsd Weekly Outlook for January 22, 2024 – Contrasting Economic Signals as Presidential Race Heats Up

• The U.S. election campaign begins with Trump remaining a key figure. However, the market is optimistic, and Trump’s influence seems to make investors confident that the Fed will cut interest rates despite a robust economy.
• German macroeconomic data remains uncertain, and inflation expectations in the Eurozone are at their lowest since 2022, suggesting that the ECB will act on interest rates by late spring.
• EurUsd returns to the early 2023 levels, showing virtually no exchange rate change despite significantly different monetary policies in the U.S. and Europe. The market is closely monitoring support and resistance levels.

Trump’s Return and Economic Uncertainty: A Test for Biden and Central Banks

In a move reminiscent of last year, Donald Trump re-enters the political arena, kicking off his campaign in Iowa. With ongoing legal challenges, Biden must regain support in an America still captivated by the tycoon, who, however, may face electoral access restrictions in some states.

Meanwhile, U.S. ten-year yields are rising again after a year-end correction, but the stock market remains optimistic about the immediate future. Market expectations haven’t changed much, with analysts still anticipating five interest rate cuts in 2024. Economic growth seems set to remain strong, as predicted by the Atlanta Fed, forecasting a 2.5% GDP growth for the first quarter. This robust growth could complicate the Fed’s decisions, as it might not necessitate interest rate cuts to boost the economy.

After hearing a very optimistic Christine Lagarde speak about inflation receding, some ECB officials have started to hedge their bets, indicating that interest rate cuts are not a certainty. Inflation expectations continue to fall rapidly, confirming Lagarde’s recent statements. From 4% in October, one-year market expectations have dropped to 3.2%. Three-year expectations have also decreased from 2.4% to 2.2%.

The ECB will have to acknowledge this, especially in light of unexciting macroeconomic data, particularly from Germany. Despite the steady decline in gas prices in Europe, the ZEW Indicator, which measures the current and future sentiment of economic operators, has decreased in its current version and slightly improved in its forward-looking one. This signals continued caution in the short term.

Technical Analysis: EurUsd Stays Consistent Amidst Shifting Monetary Policies

A year has passed, but for the Euro-Dollar exchange rate, not much has changed. The third week of 2023 closed around 1.085, and twelve months later, we find ourselves at similar levels.

However, much has transpired since then. Back then, we were in a phase of hawkish central bank policies with hefty expectations of rate hikes. Today, while still at the peak of monetary policy tightening, the market anticipates generous cuts throughout 2024, starting from spring.

Those who simply carried out financial carry trades by funding in euros and buying assets in dollars have reaped the interest rate differential. Those who hedged exchange rate risk paid a premium of just over 150 basis points, considering the benefit of reduced volatility was almost negligible.

The Bollinger Bands aptly capture the current market situation. A higher band slightly above 1.10 seems unbreakable, and a lower band around 1.05 might act as the support level the greenback struggles to breach. This reflective moment nonetheless suggests maintaining long dollar positions until there are substantial bullish signals on EurUsd.

A familiar chart illustrates a dollar attempting to break through supports that have contained its ambitions so far. However, there’s a moving average at 1.08 to breach for a more convincing push towards the 1.05 zone, which, as noted earlier, is the lower base of the Bollinger Bands. Breaking through 1.08 would be a signal to follow with a tactical short trade on EurUsd. This break has not yet been formally confirmed.