EUR/USD Forecast: Euro Hits 9-Month High on Hawkish Remarks

• Klaas Knot stated that rates would increase by 50 basis points in February and March.

• Futures have steadily decreased the expected Fed rate peak.

• Since early December, gas prices have dropped by 60% in the Eurozone.

Today’s EUR/USD forecast is bullish. On Monday, the Euro reached a nine-month high against the dollar as more hawkish remarks about European interest rates contrasted with market expectations for a more restrained Federal Reserve.

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It was supported by Klaas Knot, an ECB’s governing council member, who stated that interest rates would increase by 50 basis points in February and March and then continue to rise in the following months.

Since Knot is seen as a hawk among decision-makers, the speech was interpreted as a response to recent claims that the ECB would reduce its rate of change to quarter-point increments starting in March.

In contrast, futures have steadily decreased the expected rate peak to a range of 4.75% to 5.0%, pricing out nearly any possibility that the Fed will rise by 50 basis points next month.

This week’s scheduled flash surveys on manufacturing in January are expected to reveal bigger improvements in Europe than the US, in part due to declining energy prices.

If the most recent PMI surveys are to be accepted, the US has lost its global growth leadership position, according to Ray Attrill, head of FX strategy at NAB. Meanwhile, since early December, gas prices have dropped by 60%, significantly lessening the negative terms of trade shock weighing on the Eurozone/EUR.

Furthermore, US inflation is declining further and quicker than the Fed estimates. The USD can drop even more this year in this scenario.

EUR/USD key events today

Investors will pay attention to a speech from ECB president Christine Lagarde which might contain monetary policy clues.

EUR/USD technical forecast: Weakness in the new high

In the 4-hour chart, the EUR/USD has made a new high after breaking above the 1.0850 resistance level. It trades above the 30-SMA while the RSI trades above 50, showing bulls are in control. 

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However, the new high is weaker than the previous highs, as seen in the RSI. There is a bearish divergence from previous highs that is pointing to weakness in bulls. Bulls will need more momentum to continue the bullish trend. Otherwise, bears might come in to reverse the trend.

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