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Euro set to end the year near highs with the market looking at Fed cuts

  • The Euro wavers around 1.1050  in a choppy year-end trading session.
  • Investors bets on Fed cuts in 2024 keep USD buyers in check.
  • US data released on Thursday strengthened the case for a soft landing in Q4.

​​​The Euro (EUR) is trading moderately lower on Friday, weighed by a mild US Dollar recovery in a calm pre-holiday session. The pair maintains its broader bullish bias intact, with downside attempts limited well above 1.1000 and is on track to close the year with a 3.3% advance, snapping two consecutive years of decline. The US Federal Reserve's (Fed) dovish pivot has triggered a risk rally that has sent the US Dollar plunging across the board.

US Data released on Thursday revealed higher-than-expected Jobless claims while November’s Pending Home Sales remained flat against expectations of a 1% increase.

These figures confirm the theory that the US economy is losing pace in the fourth quarter, and on its way to a soft landing. This strengthens the case for Fed rate cuts in 2024 and adds negative pressure on the USD. 

In the Eurozone, Spanish consumer prices have remained steady at a 3.3% yearly rate. These figures confirm that inflation remains sticky in some countries endorsing the ECB’s hawkish stance and underpinning support for the Euro. 

Daily digest market movers: The Euro remains steady near highs with bets for Fed cuts weighing on the USD

  • The Euro remains firm with the US Dollar still near five-month lows amid plunging US yields.
     
  • Spanish Consumer Prices Index remained flat in December and grew at a 3.3% pace on the year, unchanged from the previous month.
     
  • On Thursday, the Governor of the Austrian Central Bank and ECB member, Robert Holzmann observed that there is no guarantee for a rate cut in 2024, which provided some support to the Euro.
     
  • US Weekly Jobless Claims increased by 118K in the week of December 15, beating expectations of a 110K reading.
     
  • US Pending home sales remained flat in November against market expectations of a 1% increase.
     
  • With only the Chicago PMI worth noting for today, recent US data is consistent with the soft-landing scenario that is fuelling bets of Fed cuts in early 2024.
     
  • Futures markets are pricing 85% chances of Fed cuts in March, and 150 bps cuts in the whole year, according to the CME Group FedWatch Tool.

Technical Analysis: Euro maintains its positive tone while above 1.1010 

The Euro is trading with a moderately bearish tone in Friday’s European session, extending its reversal from Thursday´s highs at 1.1135. The US Dollar Index has resumed its recovery although it remains capped below previous support at 101.45. A break above here would trigger a deeper EUR/USD correction.

The broader trend, however, remains bullish with the pullback from Thursday's highs seen as a corrective reaction from heavily overbought levels. On the downside,  the pair will face support at 1.1010 where the 4h 50 SMA meets previous swing highs and 1.0935.

On the upside, resistance levels remain at the July 27 high, 1.1145, which closes the path toward the 2023 high, at 1.1280.

Euro price this year

The table below shows the percentage change of Euro (EUR) against listed major currencies this year. Euro was the strongest against the Japanese Yen.

 USDEURGBPCADAUDJPYNZDCHF
USD -3.07%-5.06%-2.33%0.09%7.50%0.64%-10.21%
EUR2.97% -2.36%1.09%3.39%10.25%3.79%-7.15%
GBP4.80%2.29% 3.36%5.59%12.31%5.40%-4.89%
CAD2.28%-1.11%-2.63% 2.30%9.61%2.15%-7.70%
AUD-0.09%-3.51%-5.92%-2.41% 7.10%0.39%-10.32%
JPY-8.11%-11.42%-13.57%-10.19%-7.64% -7.80%-19.43%
NZD-0.65%-3.73%-5.75%-3.00%-0.41%6.72% -11.43%
CHF9.02%6.72%4.72%7.75%9.36%16.28%9.84% 

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Author

Guillermo Alcala

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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