EURUSD Ahead of US GDP and EU CPI

Two of the world's biggest economies will report growth and inflation data on Wednesday, which is set to move the markets and likely impact sentiment towards the money policy.

US Remains Resilient, For Now

Following last week's Nvidia-inspired rally, traders will scrutinise indicators that the US economy can achieve a "soft landing", avoiding challenges for the markets to advance. The second estimate of US GDP for Q4 is anticipated to corroborate modest deceleration to an annualised rate of 3.3% from 4.9% in Q3 but show robust expansion. It compares to other advanced economies that have recently entered or hovered on the brink of technical recessions. It is expected to be reflected in the Fed's preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, forecasted to be reported later this week.

The latest CPI report materialised higher than projected and markets advanced their estimates for when the Fed will initiate interest rate cuts to June. While the January PCE is anticipated to edge marginally lower to 2.8% from the prior 2.9%, the monthly rate of 0.4% substantially exceeds the Fed's target. It could inhibit investors from becoming too optimistic regarding rate cuts. The stronger US dollar would likely be sustained throughout the week unless the figures deliver a substantial downside surprise.

ECB First to Cut Rates?

European risk appetite has been supported by positive sentiment around AI. Still, additional backing has come as investors speculate on how soon the ECB may cut interest rates. Upcoming inflation data will be crucial for the March 7th monetary policy meeting, with some analysts suggesting the ECB could start laying the groundwork for its first-rate cut of this cycle. Inflation across the Eurozone is projected to decrease slightly to 2.5% from 2.8%, which remains above the ECB's target of 2%. However, weaker economic performance could coincide with yet another missed inflation forecast, potentially increasing expectations of a rate cut and weakening the euro.

Volatility in financial markets may surface ahead of the main release of inflation figures for the whole Euro Area, as data from individual member states such as Germany will be reported. Typically, traders seek to anticipate the composite figure by monitoring trends in above or below consensus numbers across larger economies - and a definitive trend could shape market reaction prior to the announcement. Relative to recent weeks, the euro has shown some strength as investors weigh the timing of prospective interest rate changes from the globe's two biggest central banks. Slower growth in Europe implies the ECB may be the first to end tighter monetary policy, despite the Fed having more scope to decrease rates due to higher rates. This week's economic updates could help provide clarity to investors in the run up to pivotal central bank decisions in March.​

EURUSD in H&S Pattern?

The EUR/USD currency pair has seen a notable recovery since falling to 1.07, with the crossing of the 1.09 level paving the way for potential advancement towards 1.10. This pattern could transpire should the pair find support at the head-and-shoulders neckline deviation, albeit with uncertainty in breaching the psychological 1.10 figure. However, the inability to progress higher may result in a decline towards 1.08, which could, in turn, re-expose the pair to retest 1.07.

Source: SpreadEx / EURUSD

Key Takeaways

The US economy is expected to show continued yet modest growth, with Q4 GDP figures anticipated to decelerate to an annualised 3.3% from 4.9% prior. Still, it remains a solid expectation compared to other advanced nations. Inflation, as measured by the PCE, is forecast to edge down slightly but remain above the Fed's 2% target, potentially inhibiting expectations of interest rate cuts in the near term. In the Eurozone, inflation is projected to decrease, although it will still be above the ECB's goal, with some analysts suggesting this could pave the way for the ECB to become the first major central bank to cut rates in March as growth softens. This week's economic updates from both regions may clarify the diverging monetary policy paths between the Fed and ECB.