- Expectations for immediate cuts in U.S. rates cooled down in a week scarce of data, dominated by Trump’s victory in the New Hampshire primaries.
- he ECB remains steady on rates as expected. However, the market looks into the future, anticipating the first rate cuts by spring.
- Technically, EurUsd has reached critical support levels. At this point, a response from Euro buyers is expected, even though February is not traditionally favorable for the European single currency.
Trump’s Rise and ECB’s Steady Approach Impact Markets
As Trump gains momentum by also winning the Republican primaries in New Hampshire, positioning himself as the sole serious challenger to incumbent President Joe Biden in November, investors in the United States are scaling back their interest rate expectations in light of new record highs in the stock markets and macroeconomic data that does not suggest an imminent recession. The Fed might take more time than expected to assess inflation trends, and this, combined with a potential earlier start of monetary easing in Europe, benefits the dollar.
In its first meeting of 2024, the ECB did not offer any major surprises. Some positive news emerged from the manufacturing PMI indices, while the service sector indices edged slightly lower. Both indicators, however, remain below the 50 mark. In the press conference following the decision to keep rates unchanged, Lagarde confirmed that inflation is getting back under control and converging towards 2% by the end of 2024. This, coupled with the forecast of a modest economic recovery in the early part of the year, has convinced investors that the ECB will cut rates in April. Currently, the likelihood of an initial intervention on the cost of money is around 90%.
Technical Analysis: EurUsd’s Crucial Support and Dollar Index Resilience Signal Market’s Direction
EurUsd may have ended its correction that began at the end of 2023, coinciding with a 200-day moving average that has been effective over the last year in containing both upward and downward exchange rate attempts. We knew the support zone around 1.08/1.085 would be decisive, and it is proving to be so. At this point, Euro buyers, strengthened by the bullish sequence of EurUsd lows, can attempt to re-energize the action. Seasonally, however, we are not there yet. The dollar historically loses little ground in February, so the idea is that the market will soon “test” the strength of Euro buyers to gauge the real market desire to reinvigorate the Euro.
In the absence of significant macroeconomic themes and central bank actions (except for the anticipated ECB decision), the markets have experienced a lull, allowing us to make some additional assessments on long-term technical trends. Regarding the Dollar Index, it’s quite evident how the dollar has been resilient for several months in avoiding a breach below a crucial support level, coinciding with the highs of 2017. The 102/103 area of DXY is therefore a fundamental watershed, coming off the test of the upper wall of the bullish channel. The Macd continues to point downwards, indicating that the dollar is unlikely to make significant moves in the coming months, but the longer time passes, the more the potential weakness of the greenback is scaled down, assuming of course that the long-term bullish trend does not exhaust itself in the coming years.