The Federal Reserve's interest rate is a key topic for the currency market, but only on paper. Let me explain what I mean by this. Few would deny the importance of the Fed's monetary policy. However, at the same time, the options and expectations of the Fed's rate changing in 2024-2025 currently have no impact on the dollar exchange rate. As I mentioned in my reviews, at the beginning of the year, the market was expecting an early rate cut in the US. In other words, it was overly dovish. Demand for the US currency declined back then, which might have seemed logical. But not now, when market expectations have shifted to June, and personally, I strongly doubt they won't be pushed further.
The latest inflation report turned out to be stronger than expected, so the Fed may further delay the moment of the first policy easing. In light of such events, the market expects no more than three rounds of rate cuts in 2024 and two more before the summer of 2025. Together, that's 6 or 7 rounds in 2024, which many economists were talking about at the beginning of the year. But what about the European Central Bank's rates? What should we expect from the ECB this year?
Commerzbank Economists believe that the ECB will also not be able to significantly lower interest rates, and there are several reasons for this. Firstly, the ECB rate is 1% lower than the Fed's rate. This means that the ECB has a limited opportunity to lower its rates. Secondly, economists believe that it will be very difficult for inflation to fall by 0.5% to the target level. They argue that factors such as the deglobalization of the economy and changes in the energy sector will increase corporate expenses, which will ultimately affect inflation. Thirdly, experts note a labor market deficit, which could lead to a significant increase in wages and slow down progress in slowing inflation.
Based on all of the above, the ECB has very limited potential for rate cuts in 2024. However, as we have learned earlier, the Fed will not rush forward either, so the euro and the dollar are in roughly equal conditions. Until a breakthrough above the 1.0956 mark occurs, I expect a transition to building a descending wave 3 in 3 or c.
Wave analysis for EUR/USD:Based on the conducted analysis of EUR/USD, I conclude that a bearish wave set is being formed. Wave 2 or b is complete, so in the near future, I expect an impulsive downward wave 3 or c to form with a significant decline in the instrument. An internal corrective wave is currently being formed, which could have already ended. I am considering short positions with targets around the level of 1.0462, which corresponds to 127.2% according to Fibonacci.
The wave pattern of the GBP/USD instrument suggests a decline. I am considering selling the instrument with targets below the 1.2039 level, because I believe that wave 3 or c will start sooner or later. However, unless wave 2 or b ends, the instrument can still rise to the level of 1.3140, which corresponds to 100.0% according to Fibonacci. A successful attempt to break through the level of 1.2877, which is equivalent to 76.4% according to Fibonacci, will indicate that the market is ready to increase the demand for the instrument. However, at this time it is futile, so the construction of wave 3 or c may have already started.
Key principles of my analysis:Wave structures should be simple and understandable. Complex structures are difficult to work with, and they often bring changes.
If you are not confident about the market's movement, it would be better not to enter it.
We cannot guarantee the direction of movement. Don't forget about Stop Loss orders.
Wave analysis can be combined with other types of analysis and trading strategies.