For the second consecutive week, the EUR/USD pair has been trying to conquer the 1.10 figure. While last week, the bulls managed to test the 1.1000 target, this week they can't even approach the boundaries of the 1.10 level. For instance, it failed in its latest attempt: once it approached the level of 1.0990, the pair turned and headed towards the 1.0940 mark. The formal reason for this was that the latest German report inflation reflected a slowdown in inflation. However, this is just a formal reason; the bulls are not ready to storm the key resistance level. Therefore, as soon as the price approaches the 1.1000 target, traders rush to take profits and step back a few paces to reopen long positions, so to speak, from a safer distance.
But let's return to the aforementioned data. It was revealed that the Producer Price Index in Germany decreased by 0.5% on a monthly basis (compared to an expected decline of 0.3%). The index has been in the negative territory for the third consecutive month. In annual terms, the index also entered the "red zone," dropping to -7.9% (compared to a forecasted decline to -7.3%). This index serves as an early signal of changes in inflationary trends or confirms them. In this case, we can speak of confirming the existing tendencies, as the eurozone and German Consumer Price Indices for November were also in the "red."
On Wednesday, EUR/USD traders ignored the statements of Bundesbank President Joachim Nagel, who made fairly hawkish remarks. He warned market participants against pricing in an immediate easing of monetary policy. "We must initially remain at the current interest rate plateau so that monetary policy can fully develop its inflation-dampening effect," Nagel said. He emphasized the market's miscalculations regarding a rate cut in the near future. Nagel advised people to be careful about speculation on this matter, as the central bank is prepared to maintain monetary policy parameters for an extended period.
This position aligns with ECB President Christine Lagarde's stance and, evidently, the majority of the ECB officials. At the final press conference, Lagarde refuted intentions, putting an end to the corresponding discussions. She stated that there were no discussions about easing monetary policy at the December meeting. Moreover, according to her, interest rates will remain at the current level "at least in the first half of 2024."
It is also worth quoting another representative of the ECB, a member of the Board of Governors, Yannis Stournaras (head of the Bank of Greece). He stated that before lowering interest rates, the central bank needs to ensure that inflation is "sustainably below the three percent mark." In his opinion, this is likely to happen around the middle of next year.
In other words, the ECB maintains a hawkish stance—at least in the context of keeping interest rates at the current level for the next six months.
On the other hand, the Federal Reserve exhibits a more dovish position, although some representatives of the Fed also advise traders not to rush to conclusions regarding the timing and pace of monetary easing. In particular, the head of the Chicago Fed, Charles Evans, stated that "market participants' optimism about interest rate cuts is likely beyond realistic expectations." He emphasized that the Fed should not and will not depend on what the market wants. While these comments did provide some support to the greenback, the dollar still remained under pressure overall (the US Dollar Index failed to break away from the 101 level, despite attempts to do so). The reason is that Evans's opinion is just his own (by the way, he will have voting rights next year), whereas the Fed's dot plot implies a rate cut of 75 basis points by 2024. Furthermore, there's Fed Chair Jerome Powell's dovish rhetoric, effectively announcing monetary easing. This is why the market is pricing in almost a 70% probability (according to the CME FedWatch Tool) of a 25-basis-point interest rate cut at the March meeting.
Therefore, we should be skeptic about the current decline: the dollar is currently unable to turn the situation in its favor. Moreover, if Friday's report on the core PCE index does not support the dollar, the bulls will regroup and return to the boundaries of the 1.10 figure, targeting the resistance level at 1.1030 (the upper line of the Bollinger Bands indicator on the 1D timeframe). Therefore, considering the fundamental background for the pair, it is advisable to consider long positions.