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The European Commission's improved forecasts for the Eurozone economy and Bloomberg experts' belief in a long-term hold of the ECB's deposit rate at the assumed peak of 3.75% have allowed EUR/USD "bulls" to counterattack. Buyers have licked some of the wounds inflicted by the release of inflation expectations from the University of Michigan. The indicator accelerated to 3.2%, the highest mark since 2011, which brought back talks of an increase in the federal funds rate and strengthened the position of the U.S. dollar.
According to the European Commission, the GDP of the currency bloc will expand by 1.1% in 2023 and 1.6% in 2024. This is slightly higher than the previous forecast. There is no talk of a recession, and that's good news for EUR/USD.
Eurozone GDP dynamics and forecasts
Brussels expects higher inflation figures in the Eurozone than previously assumed. Consumer prices will grow by 5.8% this year and 2.8% next year. This suggests they will not return to the 2% target before 2025. Theoretically, this requires the European Central Bank to continue the cycle of monetary policy tightening. And again, good news for the euro.
In fact, holding the rate at a high level is a form of monetary restriction in current conditions. Therefore, Bloomberg experts predict its peak at 3.75% and the first decrease in the second quarter of 2024. They believe core inflation will be 2.4% in October–December next year.
ECB deposit rate forecast
Optimistic estimates from the European Commission and Bloomberg experts have allowed EUR/USD to find the bottom, but there can be no talk of restoring an upward trend yet. According to Credit Agricole, the euro looks overpriced and vulnerable to disappointing statistics from the Eurozone. Its current fall is a result of both winding down speculative long positions and a weaker European economic surprise index compared to the U.S.
The States indeed delight the eye. Alongside impressive labor market data, high levels of inflation and rising inflation expectations suggest that the monetary policy tightening cycle can continue. CME derivatives give a 20% chance of raising the federal funds rate at the June FOMC meeting. This strengthens the position of the U.S. dollar.
Thus, the attempts of EUR/USD "bulls" to regain the initiative in their hands look unconvincing for now. Information about the absence of a recession in the Eurozone or about a long-term hold of the deposit rate at its peak will surprise no one. Another thing is that bets on the Fed's "dovish" pivot in 2023 are still excessively high. Their reduction is a positive factor for the U.S. dollar.
Technically, on the daily chart, EUR/USD continues to retreat to the upward trend due to the implementation of the Double Top pattern. As long as the pair's quotes are below the moving averages, we will focus on the development of the correction. At the same time, a rebound from resistances at 1.089 and 1.095 will allow us to increase the shorts formed from 1.101.
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