The Euro experienced slight gains against the US dollar as investors processed remarks from several hawks within the European Central Bank (ECB) while eagerly anticipating the release of a crucial US Consumer Price Index (CPI) report. This data could provide insights into when the Federal Reserve might consider implementing interest rate cuts later this year.
Luis de Guindos, the Vice President of the ECB, delivered a somber warning to the markets, suggesting that the eurozone economy appears poised for another downturn in Q4 2023. Despite a recent uptick in inflation, he highlighted the possibility of its persistence in the coming months. Soft indicators indicated economic contraction in December, with risks to near-term growth leaning towards the downside. The eurozone economy remained stagnant for much of 2023, contracting by 0.1% in Q3. A modest activity increase is anticipated in the current year, with the World Bank forecasting 0.7% growth for 2024, up from 0.4% in 2023.
The ECB faces a challenging dilemma in its upcoming January meeting, grappling with the decision of when to commence rate cuts amid a fragile economic outlook and inflation above the 2% target. Isabel Schnabel emphasized the central bank's dependence on data, stressing the need for additional evidence before contemplating rate cuts. Consequently, market expectations for policy easing were downgraded, with a rate cut in the first quarter of 2024 no longer factored in.
Lack of sustained bullish momentum caused EUR/USD to fluctuate within a narrow range of €1.0921 to €1.0981 leading up to this week's pivotal risk event. A downside surprise in the US CPI could prompt investors to elevate expectations for a Fed rate cut. In such a scenario, EUR/USD might potentially rally beyond the €1.1000 level, aiming for the December highs around €1.1100.
