The European STOXX 50 achieved a new peak in 23 years, and the broader STOXX 600 reached a two-year high. Investors closely examined the Eurozone's Q4 GDP flash data and its potential impact on the ECB's policy outlook. Preliminary figures revealed that the Eurozone economy unexpectedly avoided a technical recession in the last quarter of 2023, following a 0.1% contraction in Q3. This positive outcome was attributed to better-than-expected growth in Spain and Italy, which offset the stalling French economy and a 0.3% contraction in Germany.

Last week, ECB President Lagarde emphasized that risks to economic growth were "tilted to the downside." Recent indicators, such as the Ifo and GfK Consumer Indicators worsening unexpectedly in January and the Eurozone economic sentiment indicator marginally weakening from December's 7-month highs, raised concerns. Additionally, the IMF downgraded its growth prospects for the Euro Area for 2024 to 0.9% from 1.2%. This prompts questions about the ECB's future actions. As long as the Eurozone remains in a de facto stagnation mode and avoids a severe recession, the ECB is unlikely to respond to slower growth with immediate rate cuts. The central bank should refrain from considering rate cuts until the task of returning inflation to the target is accomplished. Only a severe recession or a significant drop in longer-term inflation forecasts below 2% would prompt a rate cut before the summer months.

In response to the slightly better-than-expected GDP print, the euro gained an average of 0.17% against most G10 peers, except the Swedish Krona. EUR/SEK declined for the 8th consecutive day as improving growth prospects continued to favor the Scandinavian currency. Meanwhile, EUR/USD traded mostly sideways, registering a modest gain of 0.1%, as traders adopted a cautious stance while awaiting the Fed's monetary policy decision later today. EUR/GBP saw a 0.2% daily gain but remained close to 5-month lows as the BoE rate decision looms tomorrow afternoon.