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Spring comes to everyone differently. Bank of France Governor and ECB Governing Council member Francois Villeroy de Galhau mentioned that the European Central Bank will lower rates this season. However, he specified that spring in Europe will span from April to June. While markets anticipate the second month, de Galhau does not dismiss the possibility of initiating monetary policy easing in April. This is unsurprising, given the close proximity of French inflation to the 2% target. Nevertheless, the situation varies in other Eurozone countries, and the ECB is not a solo actor in this theatrical scenario.
Dynamics of French Inflation
In 2024, financial markets are fixated on the timing of the onset of mass rate cuts by the world's leading central banks. Their shift from March to June for the Fed became the main driver of the U.S. dollar's strengthening in January–February. At the turn of winter and spring, investors reached a consensus with the December forecasts of the Fed, depriving the dollar of its main trump card. In March, it ceded leadership in the currency race among the Big Ten to the British pound.
Now, the markets are waiting for the updated FOMC rate forecasts. Does the Central Bank adhere to the previous position of three acts of monetary expansion, or is it ready to perform only two? In the first case, nothing will change—investors will continue to expect the start in June, and EUR/USD will likely strengthen its positions. In the second case, the timing will shift to July or September, which will drag the euro below $1.08.
However, attempting to predict the start dates of the monetary policy easing process is not the only way to forecast the future dynamics of the main currency pair. Nordea Markets analyzes bank reserves in the U.S. and the Eurozone and concludes that after a slight rise above 1.1, EUR/USD will decline.
Dynamics of EUR/USD and bank reserve ratio
This opinion contradicts HSBC's position, which expects the strengthening of the U.S. dollar in the short-term and the euro in the medium-term. However, if everyone always stood on the same side, buyers would have no counterparties for the deal.
In my opinion, the start dates are important, but in the future, investors will be interested in the speed of rate cuts. And if the Fed, due to a strong economy, can afford to ease monetary policy not at every FOMC meeting, then with the ECB, it's a different story. The weakness of the Eurozone dictates the need to cut the deposit rate not only in June but also in July. Therefore, Nordea Markets' theory looks more plausible to me than HSBC's.
In any case, EUR/USD did not receive the necessary hints from the labor market and inflation statistics in the U.S. and now eagerly awaits the March meeting of the Fed. Surely, the fate of the main currency pair will be decided there.
Technically, on its daily chart, there is an attempt by the bulls to play out a doji bar and bring quotes beyond the fair value range of 1.079–1.0945. If successful, a reversal pattern 1-2-3 may be formed, or an upward trend may be restored. Failure will allow selling EUR/USD.
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