You can't escape the truth. The divergence in economic growth, serving the U.S. dollar faithfully and truthfully for most of the year, is making itself felt again. After the U.S. GDP expanded by 5.2% in the third quarter, the French economy unexpectedly contracted, and German unemployment rose to its highest level in 2.5 years. Traders involuntarily asked themselves: did the EUR/USD rise too high?
One of the drivers of the autumn rally in the main currency pair was the assumption that the difference in economic growth between the U.S. and the eurozone would gradually narrow. Although the currency bloc continues to balance on the brink of stagflation and recession, the expected slowdown in the U.S. GDP to 0.9% in the fourth quarter, as anticipated by Bloomberg experts, will take its toll. Investors will start getting rid of the dollar.
However, at the end of autumn, the leading indicator from the Federal Reserve Bank of Atlanta signals that the gross domestic product in the United States will expand by 2.1% in October–December. In other words, at approximately the same pace as in the first and second quarters—bad news for EUR/USD. Especially since JP Morgan warns that the impact of the U.S. business cycle on the global business cycle should not be underestimated. The slowdown in the U.S. economy will affect the global GDP and put pressure on a pro-cyclical currency like the euro.
Dynamics of market expectations for the ECB rate cut in April
The idea of reducing the divergence in economic growth is being doubted. Moreover, markets cannot be deceived. Although the OECD claims that the ECB will only cut rates in 2025, investors are 100% confident it will happen in April. They give a 50% chance of a rate cut in March.
Size matters. A year ago, the futures market expected the deposit rate to rise to 2.75%, with subsequent decline to 2.25%. In reality, the indicator grew by 4%, but forecasts of its decline remained unchanged. At the same time, investors are counting on four acts of monetary expansion in 2024 and gave a 70% probability of a fifth ECB move in this direction. Expectations of a drop in the federal funds rate are much more muted amid a stronger U.S. economy compared to the European one.
Market forecasts for the ECB deposit rate
Thus, divergences in monetary policy and economic growth still favor EUR/USD. The inevitable question arises: is it time for the main currency pair to fall? It is supported by U.S. stock indices and the associated high global risk appetite, but if American inflation shows resilience and Jerome Powell demonstrates a "hawkish" rhetoric, the euro rally against the U.S. dollar will come to naught.
Technically, on the daily chart, EUR/USD is implementing a reversal pattern of 20-80 with subsequent return of the main currency pair to the fair value range of 1.051-1.091. This indicates the weakness of the "bulls" and provides a reason to increase shorts formed from the level of 1.094.