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As expected, the American central bank slowed down the rate of raising the American interest rate, as inflation in the country showed a decline, confirming that the path of tightening is reaping its benefits. Therefore, there was the strongest opportunity for the bulls to rush the euro currency pair against the US dollar EUR/USD towards the level of psychological resistance 1.1000 at the time of writing the analysis. This is the highest for the currency pair since April of 2022.
Within those strong gains, the European Central Bank is expected to raise interest rates again in January, but the due increase may leave the euro exchange rates exposed to downside risks in the near term. The European Central Bank has been a source of support for the euro since it said in December that markets are reducing the size of interest rate hikes that are still needed to reduce inflation.
The message was reinforced on Monday when Spanish CPI inflation was reported to have unexpectedly accelerated in January, a significant development as Spain tends to lead inflation dynamics in the euro area in general. But the European Central Bank will also have to consider the ongoing war in Ukraine as a negative threat to the economy, the effect of the interest rate hike that has already been delivered and the growing risk of a US recession.
Other major concerns
Another major concern is how high interest rates will affect borrowing rates in Italy and Greece, two economies that have proven sensitive to high interest rates in the past. Accordingly, it is likely that the euro exchange rates will maintain the recent gains if the European Central Bank continues to raise interest rates and provides expectations and guidance consistent with the need to take specific additional actions at subsequent meetings. But if the European Central Bank surprises by 25 basis points, or indicates that it will consider slowing the tightening cycle in light of the risks, the euro could retreat as expectations for another high interest rate hike are reduced. For his part, Dominic Schneider, an analyst at UBS, says that “expectations about future directions are less clear”. Therefore “we believe that the recent rise of the euro may lose its strength”.
Capital markets are now showing that investors have been priced in for the European Central Bank to deliver an additional 150 basis point increase in interest rates during the first half of 2023; more than any other advanced central bank. As expectations rise, the probability of negative surprises increases. Accordingly, analysts at TD Securities warn that the euro is looking to extend at current levels, having risen nearly 14% since its September lows.
But the majority of forex foreign currency analysts say that Thursday’s results are unlikely to change the broader trend of travel in the euro/dollar exchange rate. The market is pricing in expectations for a rate hike of just 20 basis points more than expected from the Fed in 2023, meaning Wednesday’s 25 basis point move could be the last.
While the Fed will likely end up with a higher final rate, it is the European Central Bank that is currently raising interest rates at a faster pace, which is important for the direction of the forex market in the near term. Along with higher interest rates in the first half of 2023, markets will assess which central banks will cut interest rates. Generally if the Fed and Bank of England enter rate cut cycles before the ECB, the euro will look supported against the dollar and sterling for most of 2023.
Today’s EUR/USD predictions for the euro versus the US dollar:
- Undoubtedly, the movement of the price of the euro currency pair against the US dollar EUR/USD towards the psychological resistance of 1.1000 confirms the strength and control of the bulls over the general trend.
- At the same time, according to the performance on the chart for the daily time frame below, it moves the technical indicators towards levels saturated with buying.
- The resistance levels 1.1075, 1.1130 and 1.1200 may be important stations to start thinking about selling to reap the profits.
- If the European Central Bank abandons the tightening path today, the euro may stop the dollar from its gains and generally the general trend will not turn into a downward one without moving towards the 1.0775 support level.
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