EUR/USD: Facing Decline as Investors Assess Central Bank Actions

Highlights

• Euro declines against US Dollar amidst central bank meeting implications.
• European Central Bank raises interest rates, prompts evaluation of monetary policy.
• Concerns arise over economic impact of rapid rate-hiking cycle in the eurozone.

Overview

The Euro encountered a slight decline against the US Dollar on Monday amid low trading volume, as investors digested the implications of recent central bank meetings.

In a busy week for monetary policy decisions, the Federal Reserve opted to leave interest rates unchanged but hinted at future rate hikes to tackle rising inflation. Meanwhile, the European Central Bank (ECB) raised interest rates by 25 basis points, signaling the possibility of further increases in the future. These developments prompted investors to carefully evaluate the monetary policy landscape.

At 10:20 GMT, the EUR/USD is trading 1.0915, down 0.0026 or -0.23%.

Eurozone Bond Yields Waver Amid Caution

Eurozone government bond yields struggled to find a clear direction on Monday, as investors remained cautious about market expectations regarding future policy rates. Analysts noted that these forecasts were nearing the upper end of expectations, adding to the uncertainty.

ECB Signals Rate Hike Plan

ECB President Christine Lagarde reiterated the bank’s plan to raise interest rates next month, with further decisions dependent on economic data. Major global investment banks adjusted their terminal rate forecast for the ECB to 4% by September, reflecting a more hawkish outlook.

Investors Worried about Hidden Risks

Amidst the eurozone’s rapid rate-hiking cycle, investors raised concerns regarding its potential economic impact, coupled with apprehensions about concealed risks within the banking sector. Moreover, the Managing Director of the International Monetary Fund, Kristalina Georgieva, underscored the significance of the ECB’s focus on taming inflation while carefully calibrating monetary policy to prevent a drastic economic downturn.

Heightened Concerns Over Policy Tightening

Market expectations for the November 2023 ECB euro short-term rate (ESTR) implied a peak deposit rate of around 3.88%, as reflected in forward contracts at 3.79%. These expectations highlighted concerns about the adverse consequences of tightened monetary policy. ECB ESTR forwards at 3.55% indicated the pricing of a 25 basis points rate cut by April 2024.

Short-Term Outlook

In summary, the Euro is facing downward pressure against the US Dollar. Investors are analyzing the outcomes of recent central bank meetings. And assessing the potential consequences of impending monetary policy changes on the eurozone’s economy.

Technical Analysis

The EUR/USD is edging lower on Monday, but holding above the strong side of the 1.0807 (PIVOT), which is now support. If the upside momentum continues then look for a test of 1.0979 (R1). Taking out this level, however, could trigger an acceleration to the upside.

Breaking back below 1.0807 will signal the return of sellers. This could lead to a retest of 1.0635.