Victory in one battle does not signify victory in the entire war. Even if EUR/USD managed to rise in response to the ECB's deposit rate hike to 4%, the pair's future still looked bleak. The Eurozone's economic weakness is exacerbated by the onset of colder weather and new fears of an energy crisis resurgence. The difference in bond yields between the U.S. and Germany is so significant that hardly anyone would want to repatriate funds from the New World to the Old. And these are far from all the "bearish" arguments against the main currency pair.
Bank of America remains in the camp of euro sellers, even if the ECB's rate hike triggers a short-term increase in EUR/USD quotes. The premium in U.S. bond yields, more optimistic prospects for the U.S. economy compared to Europe, and rising commodity prices, which are unfavorable for a commodity importer like the Eurozone, allow the bank to maintain its bearish view on the main currency pair.
Nomura believes that the continued rally in commodity assets could take EUR/USD to the 1.04 mark, and Citigroup has lowered its 12-month euro forecast from 1.14 to 1.06. The company is confident that a recession in the Eurozone will come sooner rather than later, compared to the U.S. Given that the U.S. economy continues to ignore signals of yield curve inversion, that seems likely to be the case.
By the way, the difference between U.S. 10-year bond yields and 3-month T-bills has set a record for the longest duration in the red zone. It was first recorded in the 1980s. The inversion of the indicator in 2022 allowed Bloomberg experts to predict a downturn in 2023. So far, it has not happened, but that does not mean there won't be a recession later on, perhaps in 2024. After all, why did the yield curve invert in the first place? It accurately predicted all eight previous economic downturns in the U.S.
Duration of the inversion of the yield curve in the U.S.
TS Lombard believes that the factor of American exceptionalism will continue to support the U.S. dollar into 2024.
In any case, the EUR/USD pair is currently facing the ECB meeting. The central bank has decided to raise the deposit rate from 3.75% to 4%, in line with the expectations of 32 out of 34 Bloomberg experts. The market assessed the likelihood of this outcome at 70%. The prospect of the rate hike supported the euro ahead of the Governing Council meeting. However, since the regulator's decision was not a surprise, the main currency pair dropped below 1.07.
Investors fear that the tightening of monetary policy will require Christine Lagarde to adopt a neutral or "dovish" rhetoric. The Frenchwoman may pose an insurmountable barrier to the rise in borrowing costs or dwell too long on the weakness of the Eurozone economy.
Technically, on the daily chart, EUR/USD's inability for the "bulls" to hold above the lower bound of the fair value range near 1.0765 and the pivot level at 1.072 indicates their weakness. A drop in the pair below the local low at 1.0685 may serve as the basis for sales towards 1.059.