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EURUSD dynamics: Speculations, market sentiment and potential trends, January 22, 2024

EURUSD dynamics: Speculations, market sentiment, and potential trends

The upcoming week is anticipated to witness the initial policy decisions of central banks in 2024. The participating institutions, including the European Central Bank (ECB), the Bank of Canada, the Bank of Japan, as well as the central banks of Turkey and Norway, will play a crucial role in determining interest rates. Investors are particularly keen on observing the actions of Christine Lagarde, President of the ECB.

Until now, investors had been expecting the eurozone to experience its first interest rate cuts soon. However, the European institution is likely to aim at tempering these high expectations. The primary focus of communication will revolve around the wage developments in the eurozone, which will significantly impact the ongoing trajectory of inflation.

Despite Lagarde's statement during a mid-December press conference that interest rate cuts were not discussed at the monetary policy meeting, members of the ECB's Executive Board openly entertained the possibility during interviews at the Davos economic summit. Lagarde herself hinted last Wednesday that interest rate cuts might be on the horizon later this year, possibly in the summer.

This newfound transparency from decision-makers is expected to be well-received by investors, affirming their speculations about an impending series of interest rate cuts. Currently, the market anticipates the first reduction in April, with a total of six cuts of 25 basis points each by the year's end. This would result in a deposit rate of 2.5 percent by December.

Market expectations, however, appear to be somewhat exaggerated, with their unintended consequence potentially hindering the effectiveness of a restrictive monetary policy. Consequently, mitigating these speculations becomes the primary task for the European Central Bank in the upcoming Thursday session.

A slight shift in sentiment was already evident in the past week, leading to declines in the DAX index (reaching its lowest point since December 5), which were largely recovered towards the end of the week.

For the ECB, the current focal points include the dynamics of wage growth and profit margins. The Chief Economist of the ECB recently highlighted that data on wage settlements in the first quarter will only be available at the end of April, potentially influencing the bank's projections in June. From an inflation perspective, the critical factor is the extent to which companies pass on higher labor costs to consumers.

Additionally, emphasis will be placed on risk factors, such as potential increases in energy prices and likely disruptions in supplies. Events in the Middle East, particularly in the Red Sea, have led to a rise in freight rates for container transport. This can directly impact higher oil prices, thereby contributing to inflation and complicating the achievement of the ECB's target.

In the currency market, the main EURUSD pair has witnessed recent declines. Tuesday, in particular, was marked by volatility as Americans returned after an extended weekend, causing the dollar to gain value. The chart indicates a pattern of equal corrective declines, referencing those starting on December 28 and those from the end of November and the beginning of December last year. This pattern suggests a potential rebound.

Another factor signaling a potential trend change is the presence of a double bottom (from Wednesday and Thursday). Furthermore, a divergence in the stochastic oscillator with the daily chart of the instrument is evident. Conversely, the breakthrough of the medium-term upward trendline implies the possibility of further declines.

All indications point to the resolution of future market movements potentially occurring on the upcoming Thursday, with quotes likely consolidating until that time.


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