When central banks led by the Federal Reserve raised rates, their determination led to the strengthening of national currencies. Caution, on the contrary, weakened them. Now, it's a different story. The reference to caution in the minutes of the latest FOMC meeting halted the decline of the U.S. dollar. The Federal Reserve stated that it would act extremely carefully and monitor incoming statistics.
If monetary policy depends on data, no matter how many central bank officials talk about a possible resumption of the monetary restriction cycle, weak figures prompt the urgent market to make opposite bets. In this regard, the 5.4% MoM decline in durable goods orders in October could have been a catalyst for the resumption of the upward trend in EUR/USD. It didn't happen. Due to the unexpected decrease in initial jobless claims to 209,000, indicating labor market strength.
Contradictory statistics increase the risks of consolidation for the main currency pair. Especially since European Central Bank officials are no less dissatisfied with market forecasts than their colleagues from the Federal Reserve. Bundesbank President Joachim Nagel said borrowing costs should remain high for a sufficient period. Although it is impossible to predict exactly how long this interval will be, it is highly unlikely to end in the next few months. Investors, however, expect a 100 bps rate cut in ECB deposit rates. The first act of monetary expansion, in their opinion, should take place in April.
Market expectations for a reduction in ECB deposit rates
ECB Vice President Luis de Guindos has no intention of commenting on market pricing but has reminded that the ECB's strategy is very clear. The decisions of the Governing Council depend on data. He will see how events unfold. Given the forecast acceleration of inflation from 2.9% by ECB President Christine Lagarde and Executive Board member Isabel Schnabel, investors' bets on monetary policy easing indeed seem overstated.
However, if, under any other conditions, attempts by ECB officials to dissuade markets from a dovish pivot would lead to a strengthening of the euro, they currently have the opposite effect. The hopes of mass easing of monetary policy by central banks led by the Federal Reserve underpin the rally in U.S. stock indices, strengthen global risk appetite, and undermine the position of the U.S. dollar as a safe-haven currency. If monetary stimulus is not provided in a timely and sufficient manner, the S&P 500 will fall. This process will trigger a correction in EUR/USD downward.
The markets may have gone too far with forecasts of rate cuts. Significant deterioration in the U.S. and European economies is required for such a serious turn.
Technically, the inability of the EUR/USD bulls to consolidate above 1.094 is a sign of their weakness. We maintain shorts formed from this level and increase them in case of a decline in quotes below 1.088.