Euro's "Broader Corrective Undertone is Clear on Weekly chart" say Scotiabank

January 11, 2024 - Written by Tim Boyer

STORY LINK Euro's "Broader Corrective Undertone is Clear on Weekly chart" say Scotiabank

The Euro to Dollar (EUR/USD) exchange rate was again held in tight ranges during Wednesday.

EUR/USD found support just above 1.0920, but secured only a brief move above the 1.0950 level.

There were no significant US developments during the day with an absence of market-moving factors.

According to Scotiabank; “there is little to suggest FX markets are doing anything different from the trading patterns seen so far this week—idling ahead of tomorrow’s US CPI data.”

The US inflation data will be important for near-term expectations surrounding Federal Reserve policy, bond yields and currency markets.

Consensus forecasts are for a 0.2% increase in prices for the month with the year-on-year headline rate edging higher to 3.2% from 3.1%.

Core prices are forecast to increase 0.3% on the month with the annual increase slowing to 3.8% from 4.0%.

Ahead of the data, markets are pricing in just over a 70% chance that interest rates will be cut at the March policy meeting.

Stronger than expected data would trigger fresh doubts whether the Fed would be in a position to make a move in March.

MUFG sees scope for a further dollar correction stronger. It commented; “As stated here prior, the EUR/USD rate does look to have over-extended to the upside during the end-2023 US dollar sell-off and if we are to see a realignment of spot to relative short-term rate levels, then there is scope for EUR/USD to continue drifting lower toward the 1.0700-level.”

ING suspects the inflation data may not have a major impact; “We expect the pair to consolidate in a 1.0880/1.1020 range in the coming days barring surprises on the US inflation side.”

Equity markets will continue to be watched closely given the impact on risk appetite and currency markets. Wall Street was little changed on Wednesday with European bourses slightly lower.

MUFG sees the potential for a further underlying correction after sharp gains towards the end of 2023.

It added; “Declining equity markets globally, even only modestly, will help reinforce gradual US dollar recovery.”

According to ECB council member Schnabel, the near-term economic outlook remains weak, in line with the bank’s expectations

She did, however, add there is evidence that sentiment indicators are bottoming out.

Schnabel also warned that underlying price pressures remain elevated and that the bank needs to remain vigilant.

She added that; “some moderation in wage growth is still likely and a soft landing of the economy remains a possibility.”

The Euro was unable to make any headway on the comments.

ING considers the potential impact of hawkish rhetoric. It noted; “We could see some short-term benefits to the euro as hawks voice their inflation concerns, but those have proven to be neither sizeable nor long-lasting in the past months.”

Scotiabank is still cautious on the Euro outlook.

It noted; “Short-term patterns lean somewhat bearish, however, and the broader corrective (negative) undertone in the EUR is clear on the weekly chart after the turn lower in spot from the late December high.”

Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank. Commented; "The consolidation in U.S. yields prevents a further selloff in the greenback before more clarity on inflation."

He added; "The higher shipping costs due to Red Sea tensions may not show in the December data, hence we may not see the Fed doves take a break this week."

Markets will, however, be monitoring developments in the Middle East closely. On Wednesday, the US and UK navies stated that they had repelled the largest attack on Red Sea shipping by Houthi rebels.

If tensions increase further there will be the risk of a negative impact on risk aversion and a spike in oil prices.

These elements would tend to underpin the dollar, especially if equities declined while there would be a negative impact on the Euro.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Euro Dollar Forecasts