26/07/2024
Written by: Ian Morley
Summary
After the recent ECB meeting, market expectations for an interest rate cut in April surged from 60% to 95%, leading to a widespread decline in the Euro. The decision was influenced by data reflecting sluggish growth and decreasing inflation. Despite acknowledging downside risks to economic growth and inflation, ECB President Lagarde expressed caution due to potential upside risks to inflation amid geopolitical tensions and upcoming wage negotiations. Meanwhile, GBP to EUR reached its highest level since August 2023.
The USD also gained momentum, fuelled by Q4 GDP figures exceeding expectations at 3.3%. GBP to USD maintained a narrow range but may test the lower end soon. The combined impact of the ECB meeting and strong GDP numbers pushed EUR to USD to one-month lows, breaching the 200-day moving average. Sustaining levels below this could lead to a retest of lows seen on December 8th.
In the current market scenario, the USD is poised to finish higher for the fourth consecutive week. The focus is on the December core PCE inflation data, expected to confirm the Federal Reserve’s completed objectives. Any unexpected positive surprises in the data could significantly impact the markets.
Today, global markets exhibit a risk-off sentiment, with Asian equities sliding and US futures indicating a lower start, influenced by Intel’s recent earnings report. This environment is conducive to safe-haven flows into the USD. There is ongoing concern about the Euro’s weakness, prompting clients to hedge gains, especially on GBPEUR. While GBPEUR upside appears limited to 2023 highs, EUR to USD may face further downside risks if demand for the USD persists.
The 25th anniversary of the Euro is marked this month, highlighting its success as the world’s second reserve currency. Used by nearly 250 million Europeans across 20 countries, the Euro has brought stability to the region, contrasting with the volatile periods of individual currencies. Over the years, GBPEUR has traded as high as 1.75 and almost reached parity during the great financial crisis.