EUR/USD Forecast – Prices, Charts, and Analysis

• Euro Area business activity remains weak.
• EUR/USD fails its first re-test of 1.1000

Most Read: ECB Keep Rates Steady with Tentative Inflation Downgrades, EUR/USD Rises

The Euro Area economy continues to struggle and is set to enter a technical recession in the coming weeks. According to data provider HCOB, business activity in the Euro Area fell at a steeper rate in December, closing off a fourth quarter which has seen output fall at its fastest rate for 11 years barring only the early-2020 pandemic months.

Commenting on the data, Dr. Cyrus de la Rubia, HCOB chief economist said,

‘Once again, the figures paint a disheartening picture as the Eurozone economy fails to display any distinct signs of recovery. On the contrary, it has contracted for six straight months. The likelihood of the Eurozone being in a recession since the third quarter remains notably high.’

Thursday’s ECB meeting saw the central bank push back against aggressive market pricing of nearly 150 basis points of rate cuts in 2024. President Lagarde said that rates would be set at sufficiently restrictive levels for as long as possible to bring inflation back to target (2%), and that the governing council had not discussed any rate cut timetable. If the Euro Area falls into recession, as looks likely, and inflation continues to fall, the ECB may have to change tack on interest rates and start priming the market for a series of cuts next year. The financial markets are already pricing in the best part of five 25 basis point rate cuts in 2024.

The ongoing weakness in the US dollar accelerated late Wednesday after Fed Chair Jerome Powell held rates steady for the third month in a row and gave a strong signal that interest rates would be cut in 2024. The Fed indicated that they could cut rates by 75 basis points next year, but this was seen by the market as lowly. After the FOMC press conference had ended, market expectations of US rate cuts for 2024 rose to 150 basis points, with the first 25bp cut seen in March. These expectations, and the selloff in US bond yields, caused the US dollar to fall further. EUR/USD touched 1.1009, just a few pips away from making a new four-month high, before ending the session just below 1.1000. Today’s PMI data will it harder for EUR/USD to make a confirmed break above 1.1000, especially if current ECB rate cut expectations become baked in.

EUR/USD Daily Chart

Chart Using TradingView

IG retail trader data shows 37.02% of traders are net-long with the ratio of traders short to long at 1.70 to 1.The number of traders net-long is 19.69% lower than yesterday and 43.14% lower than last week, while the number of traders net-short is 17.74% higher than yesterday and 47.89% higher than last week.

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