Those who thought that the fall of the U.S. dollar in 2023 would be like a one-way street have deeply miscalculated. At the beginning of the year, the U.S. currency showed all detractors its capability. The EURUSD pair collapsed to 1.0515 amid slowing inflation in Germany and France. Only expectations of a split in the ranks of the FOMC allowed the euro to lick its wounds the next day.
The hawkish rhetoric of the members of the Governing Council was so strong that the derivatives market believed that the deposit rate would rise to a peak of 3.4% in 2023. At the same time, supporters of aggressive monetary tightening said that the ECB had done only half the battle by raising the cost of borrowing by 250 bps. Moreover, officials hinted that investors underestimated the decisiveness of the central bank.
Nevertheless, everyone understands that words are one thing and deeds are another. If inflation starts to slow in the eurozone, the ECB will have no choice but to slow down monetary easing. That is, to follow the same path as the Fed at the end of the third quarter. The USD index lost about 8% of its value at the end of the fourth quarter. The euro may face the same threat.
In this regard, the reaction of EURUSD to the slowdown in consumer prices in eurozone countries looks natural. German inflation fell to 9.6% in December after rising by 11.3% in November—less than the 10.7% expected by Reuters experts. The same process took place in France, where CPI fell from 7.1% to 6.7%, which experts predicted to rise to 7.3%.
Dynamics of inflation in Germany
If inflation in the leading economies of the currency bloc and in the community, as a whole, has passed its peak, should the ECB maintain its previous aggressive rhetoric? After all, raising the deposit rate by another 50 bps at each of the next two meetings of the Governing Council is fraught with deepening recession.
The fact that Financial Times experts do not believe in the growth of borrowing costs above 3% in 2023, and two-thirds of respondents predict their decline in the coming year, was another catalyst for the fall of EURUSD. Five out of six economists expect the ECB's monetary restriction to end in the next six months.
Deadlines for the termination of the ECB monetary restriction
The thin market also played on the side of the "bears" for the main currency pair. When not all investors have returned to their jobs yet, the lack of liquidity can provoke sharp movements.
Partial recovery of EURUSD is associated with profit-taking on short-term shorts by speculators in anticipation of the publication of the minutes of the December meeting of the FOMC. It can show a split in the ranks of the Fed, which will play on the side of the euro.
Technically, a rebound from the pivot level and fair value at 1.0615 will prove the strong position of the bears and will allow increasing EURUSD shorts formed on the break of the lower border of the inside bar at 1.065. The initial targets for the downward movement may be 1.049, 1.046 and 1.041.