FX.co ★ Underlying reasons behind EUR's growth and investment luster

The euro has been heading for new one-year highs while traders are taking no notice of positive statistics from the US. Markets are certain that the Federal Reserve will have to wind up in full its aggressive monetary tightening cycle in the near future. This decision would be appropriate as inflationary pressure has been ebbing away. Before we discuss the technical picture of EUR/USD, let's look into the latest forecasts of economists related to the ECB monetary policy.

Most market participants believe that the European regulator will raise the cost of borrowing to a maximum of 4% by September this year, as inflation remains stubborn in the eurozone. This means that two more quarter-point moves can be expected starting from July 27. Earlier, analysts predicted that the deposit rate would reach a peak of 3.75%.

Analysts have to revise their forecasts because they should downgrade their expectations for inflation. In the US, the annual CPI dropped significantly in June of 2023, which also led to a decline in core inflation. In contrast, in the euro area, one cannot count on such an active slowdown in the coming months. Annual headline inflation will loosen its grip at a slower pace than expected. Moreover, inflation in 2025 is now projected at 2.1%, up from 2% previously.

I have repeatedly noted that monetary authorities have been closely monitoring the rise in core prices, even though headline inflation declines. The overall consumer inflation is now expected to be slightly lower this year than in the past. But forecasts for 2024 and 2025 have been upgraded to 2.8% and 2.4%. These projections even surpass the ECB's own forecast for this year.

The revision of the forecasts came after the ECB debate broke out over the peak interest rate in an unprecedented series of rate hikes. Some officials are reluctant to rule out an extension of the campaign after a summer hike, although some worry about an economy that is struggling to pull out of a mild recession that has been going on since this winter. Interestingly, virtually all ECB policymakers dismiss the talk of a hard landing, and many economists agree with them. The consensus suggests that gross domestic product might grow by 0.2% in each subsequent quarter. Economists maintain their growth forecast of 1% and 1.6% for 2024 and 2025. However, despite this optimism, market participants do not expect the first interest rate cut in the eurozone to take place until April 2024.

Another reason is the expected divergence from the Federal Reserve's policy as some economists expect rate cuts as early as December this year. All in all, the euro's investment luster is not particularly surprising, especially after a long period during which the trading instrument has been under pressure from the US dollar and was heavily oversold.

As for the technical picture of EUR/USD, if the buyers want to maintain control, they need to push the price above 1.1240 and consolidate there. This will allow getting out to 1.1275 and 1.1310. Already from this level, it is possible to climb to 1.1350, but it will be rather problematic to do it without strong statistics on the eurozone. In case the trading instrument decreases, I expect any serious actions from large buyers only in the area of 1.1210. If no one is there, it would be a good idea to wait for a lower low at 1.1170 or go long from 1.1130.

As for the technical picture of GBP/USD, the demand for the pound remains quite buoyant. It indicates that the bull market is still in progress. Traders could count on GBP/USD's growth after the bulls take control over 1.3140 as a break in this range will strengthen hopes for a further recovery to the 1.3170 area. Once this level is taken out, the door will be open for a sharper upward move to the 1.3200 area. If the instrument falls, the bears will try to take control of 1.3070. If successful, a break of this range would hit the bulls' positions and push GBP/USD to a low of 1.3030. Then, the instrument may easily decline to 1.2980.