13.12.202400:40 Forex Analysis & Reviews: EUR/USD: PPI and the ECB

The EUR/USD pair exhibited increased volatility on Thursday but failed to establish a clear directional movement. Initially, traders reacted to the release of the PPI by updating a 1.5-week low (Thursday's intraday low at 1.0464). Subsequently, the pair returned to the 1.05 level, responding to European Central Bank President Christine Lagarde's rhetoric, only to drop again below the 1.0500 target. This back-and-forth behavior leaves the pair essentially range-bound. The situation resembles a tug-of-war, with sellers and buyers pulling in opposite directions, oscillating prices between the 1.04 and 1.05 zones.

The inflation report showed most components exceeding expectations. The monthly headline Producer Price Index rose to 0.2% (vs. a forecast of 0.3%), marking the second consecutive month of growth. Annually, the headline PPI surged to 3.0% in November, outperforming expectations of 2.6% and marking the fastest growth since March 2023.

The core PPI, which excludes food and energy prices, matched forecasts at 0.2% m/m. Annually, it remained unchanged at 3.4%, defying predictions of a decline to 3.2%. The core PPI was released at the same level in October and before that - in April 2023.

The PPI report complements the fundamental picture painted by Wednesday's U.S. CPI data. The annual headline Consumer Price Index accelerated to 2.7% (the second consecutive month of growth), while core CPI remained at 3.3% for the third month.

These data points highlight accelerating headline inflation in the U.S. while core inflation stagnates. This suggests the Federal Reserve will likely slow its pace of monetary easing next year. Though a rate hike remains premature, some Fed officials have begun hinting at such a possibility. For instance, San Francisco Fed President Mary Daly recently suggested rate hikes could be considered if inflation accelerates consistently.

How the Fed will react to the November reports on CPI and PPI growth is unknown. With the Fed's 10-day "quiet period" before its meeting, the impact of November's CPI and PPI reports remains uncertain. The outcome will be revealed next Wednesday at the December meeting, but the inflation uptick already strengthens the U.S. dollar's case.

The ECB concluded its final meeting of the year, cutting rates by 25 basis points as widely expected. This decision was fully priced in, leaving little impression on EUR/USD traders. Attention shifted to Christine Lagarde's remarks, leaving buyers and sellers disappointed.

Lagarde acknowledged that the eurozone's economic recovery was "much slower than expected" and noted that some ECB members considered a 50-basis-point rate cut but opted for a more measured approach. These dovish signals pressured the euro. However, Lagarde also expressed concerns about inflation risks, citing geopolitical tensions, rising energy costs, transportation expenses, and increasing wages and corporate profits.

Lagarde added that the ECB had not discussed the neutral interest rate level, as defining it now is "quite challenging," leaving the topic for future discussion.

Additionally, the ECB removed a phrase from its accompanying statement, which previously committed to keeping rates "sufficiently restrictive for as long as necessary."

Furthermore, the ECB downgraded its eurozone growth forecast for 2024 to 0.7% (from 0.8%) and revised its inflation projection downward to 2.4% (from 2.5%).

In summary, while the ECB hinted at conventionally hawkish signals, the central bank made it clear that rate cuts would continue into the first half of 2025, limiting support for the euro.

Thursday's mixed fundamentals left traders indecisive, with neither buyers nor sellers taking control.

Technically, EUR/USD failed to breach the 1.0530 resistance level (the midline of the Bollinger Bands on the daily chart). Meanwhile, sellers aimed for 1.0440 (the lower Bollinger Band in the same timeframe), but the bearish momentum stalled at 1.0464.

Given the current backdrop, further price declines seem likely, as the market has yet to price in U.S. inflation acceleration fully. Thus, using corrective price pullbacks as opportunities to open short positions appears prudent. The initial and primary downside target is 1.0440, corresponding to the lower Bollinger Band on the daily chart.