- The European Central Bank is poised to hold historically high borrowing costs.
- Investor expectations suggest a possible ECB rate cut in the spring.
- The Fed recently signaled lower borrowing costs in the US.
On Thursday, the gains in the EUR/USD outlook persisted, supported by the Federal Reserve’s dovish comments and in anticipation of the upcoming European Central Bank (ECB) meeting. Looking ahead, the ECB is expected to uphold historically high borrowing costs, reinforcing the positive sentiment surrounding the currency pair.
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However, President Christine Lagarde faces pressure to defend or abandon her guidance that rates will remain unchanged for the next few quarters. Meanwhile, investor expectations suggest a possible rate cut in the spring. Consequently, such a move would position the ECB as the first major central bank to reverse its rate hike course.
Still, Lagarde will likely resist rate-cut speculations, especially after a year and a half and ten consecutive hikes to lower inflation. On the other hand, yesterday’s Fed meeting signaled impending lower borrowing costs, indicating up to three cuts. This makes any ECB resistance more difficult.
Following the Fed’s dovish commentary, the euro strengthened over 1% against the dollar, and rate cut expectations surged. Currently, markets are pricing in 155 basis points of ECB easing in the coming year, including two moves by April.
This pricing aligns with expectations for the Fed for two moves by May 1, with 155 basis points over 2024. Furthermore, updated economic projections are likely to strengthen expectations of an ECB pivot, as they are expected to reveal lower inflation and growth, particularly for the next year.
EUR/USD key events today
- US retail sales
- US initial jobless claims
- ECB policy meeting
EUR/USD technical outlook: Pullback looms as buyers face strong resistance
The bias for EUR/USD on the charts is bullish. This shift in sentiment happened recently when the downtrend found strong support at the 1.0750 key level. Consequently, bears weakened as the price started moving sideways before it broke above the 30-SMA resistance. After pulling back to retest the SMA, the price shot up with a strong bullish candle, breaching the 1.0851 key level.
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Still, the recent bullish move is a retracement of the previous bearish trend. Moreover, the price has retraced to the key 0.618 fib level. The bullish move might pause at this level for a pullback to retest 1.0851 before the bullish move continues.
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