13.12.202400:40 Forex Analysis & Reviews: Euro Shifts Its Tone

The European Central Bank did everything expected of it—lowering the deposit rate by 25 basis points to 3%—and issued several signals about continuing monetary easing. However, these signals were not strong enough to definitively sink EUR/USD. The primary currency pair rebounded from the support level of 1.0470 and returned to what it had been doing for weeks: consolidating. But how long will it last?

Only one major bank surveyed by Bloomberg anticipated a 50-basis-point rate cut from the ECB in December. JP Morgan cited weaker-than-expected data on the eurozone economy and inflation. The rest opted for a 25-basis-point cut, which ultimately occurred. Meanwhile, the ECB downgraded its inflation forecasts 2024 from 2.5% to 2.4% and for 2025 from 2.2% to 2.1%, hinting at a near-term continuation of its monetary policy easing cycle.

Before the ECB's December meeting, the futures market was 100% certain of a 25-basis-point rate cut in the next two Governing Council meetings and priced a 60% probability of a 50-basis-point cut in March. These expectations remained essentially unchanged following the accompanying statement.

Market Expectations for ECB Rate Cuts

The second signal of the ECB's willingness to continue easing came from altered language. Previously, the ECB stated it was prepared to keep the deposit rate at restrictive levels "as long as necessary." Starting in December, this phrase was removed from the accompanying statement, signaling a dovish shift. According to ING, investors should anticipate further reductions in borrowing costs.

That is, of course, unless the data indicates otherwise. When the ECB cut the deposit rate to 3.25% in October, many officials expected an accelerated easing cycle by December. However, strong GDP data for the third quarter compelled the central bank to take a more cautious approach. The upcoming months will reveal whether this trend holds.

Bond Market Reaction to U.S. Inflation

Meanwhile, mixed signals emerged from the United States. The November Producer Price Index (PPI) accelerated to 0.4% m/m, twice the Bloomberg consensus estimate. Jobless claims surged to 242,000, the highest level since early October. Considering the reduced sensitivity of U.S. bonds to inflation data and heightened reactions to labor market data, such figures are more likely negative for the dollar than favorable.

On the daily chart, EUR/USD has formed a Broadening Wedge pattern. If the bulls win the battle for the 1.0470 level, consolidation in the 1.0470–1.0615 range will continue, providing an opportunity to open long positions on a rebound. Conversely, a breakout below this critical support would justify adding to previously established short positions.