EURUSD Ahead of ECB and US GDP

As the world's two largest economies continue along divergent paths, observers will watch for any signs of synchronisation, or lack thereof, in their respective central bank policy approaches.

ECB Policy Expected to Stay Unchanged

Economists unanimously agree that the ECB will leave interest rates unchanged at this week's monetary policy meeting. Attention will instead shift to the bank's forward guidance on the timing of any potential rate cuts. While some ECB officials have attempted to downplay rate cut speculation, arguing policy may stay pat through year-end, markets are pricing in 150 basis points of cuts over the same period. Most economists also foresee rate cuts beginning as early as the second quarter. A small but notable minority even project decreases starting in March.

Recent economic data has pointed to easing conditions in the Eurozone, with core inflation falling and growth slowing. As such, markets will scrutinise the ECB's rhetoric for hints of increasing dovishness. President Christine Lagarde previously stated that rate cuts were not up for discussion at the last meeting. A mere acknowledgement of rate cut talk could increase speculation of ECB cutting.

US Growth Expected to Remain Robust

Later in the day, the US will provide an initial look at its Q4 GDP figures. Forecasts anticipate a slowdown from the blockbuster pace in Q3, with a consensus of 1.8% versus 4.9% annualised growth prior. This would represent the weakest quarter of 2023 expansion thus far, though the Fed's GDPNow model projects higher annual growth of 2.4%. Attention will centre on personal expenditures, the main driver of last quarter's growth, and what it portends for ongoing US consumer resilience. A recent NABE survey shows that most economists consider continued expansion in the coming months and the US avoiding a recession.

Policy Divergence on the Horizon?

The divergence between the US and Eurozone may lead to adjustments in relative currency values. While markets are pricing in only four rate cuts for the Eurozone as it struggles with stagnation, they see six rate cuts for the US despite robust growth. But having raised rates more aggressively than its European counterpart to date, the Fed's actions could partly explain the differential. Yet, signals of waning ECB hawkishness after this week's decision may also prompt traders to bring forward expectations of lower Eurozone rates. It would likely require more than rhetoric alone to impact EURUSD substantially.

EURUSD in Falling Wedge

The completion of a falling wedge at 1.0821 signals a potential bullish pullback since the wedge appears at the beginning of the trend. Breaking past the upper wedge trendline and 1.0916, EURUSD could start moving towards the first wedge peak at 1.10. Conversely, sliding below the lower wedge trendline could confirm a trend continuation, opening the door to 1.0723. There, chances of a head-and-shoulders pattern would increase, should the neckline support hold firm.

Source: SpreadEx

Key Takeaways

The ECB is expected to hold at their upcoming monetary policy meeting with markets focusing on any hints about potential future rate cuts. In the US, most economists believe the US economy will continue to grow in the coming months without entering a recession. However, US Q4 GDP is forecast to slow by 1.8% year-on-year. While the ECB may signal a more dovish policy, the Fed has already raised rates more aggressively, partly explaining pricing differentials. Any signals of lower Eurozone rates could push market expectations of rate cuts forward, but it would require more than rhetoric alone to impact EURUSD significantly.