For a while, the market recalled Jerome Powell’s optimism about the U.S. economy and started to grow. This boosted global risk appetite and pushed EUR/USD quotes upward. However, to anticipate a continued rally, one needs to have their own aces. Sadly, the euro’s aces are so weak that they don’t intimidate its adversaries.
The hawkish speeches from the Governing Council appear to be a voice in the wilderness. Following Austria’s Robert Holzmann, Bank of Latvia Governor Martins Kazaks began promoting the idea of raising deposit rates in September. In his view, it’s better to overdo monetary tightening than to allow inflation to accelerate again. In the first case, the ECB can always reduce borrowing costs. In the second, it will have to sharply raise rates, resulting in a recession.
The problem is that economic downturn risks in the eurozone are beginning to outweigh the probability of a new CPI peak. Money supply in the region shrunk in July for the first time since 2010 due to decreased lending and a withdrawal of deposits from the banking system. This trend is good news for the ECB regarding inflation, but it increases the risks of GDP contraction.
Dynamics of private sector lending in the eurozone
The eurozone’s economy, teetering on the brink of stagflation and recession, to put it mildly, doesn’t assist the EUR/USD bulls. However, the euro is a pro-cyclical currency. Typically, it gains preference when global economic growth accelerates. The eurozone doesn’t necessarily need to be thriving. What’s essential is that other giants, like the U.S. and China, pick up the slack. In this regard, the robust U.S. provides the necessary buffer for the main currency pair. Unfortunately, it’s not enough. China continues to disappoint.
Bloomberg experts lowered their GDP growth forecast for China in 2023 from 5.2% to 5.1%, which is very close to the government’s target of 5%. The primary challenges, in their opinion, will arise in the third quarter. They expect the GDP in July–September to expand by 4.4%, not the previously forecasted 4.6%. China’s economy is expected to grow by 4.5% in 2024, down from the previous 4.8% prediction.
China’s GDP forecasts
In summary, both the eurozone and China are on shaky ground. This doesn’t allow EUR/USD to gain momentum. Moreover, chances of the federal funds rate rising to 5.75% by the end of 2023 exceed 50%. The Federal Reserve’s dovish pivot is expected in June, not March. Such an urgent market situation, combined with the highest bond yields in over a decade, allows the U.S. dollar to feel right at home.
Technically, the EUR/USD bulls’ attempt to counterattack fell flat. Buyers couldn’t leverage the internal bar and reach even the EMA. A return of the pair’s quotes to the pivot level at 1.0795 and its breakdown may lay the foundation for selling.
The material has been provided by InstaForex Company – www.instaforex.com
For a while, the market recalled Jerome Powell’s optimism about the U.S. economy and started to grow. This boosted global risk appetite and pushed EUR/USD quotes upward. However, to anticipate a continued rally, one needs to have their own aces. Sadly, the euro’s aces are so weak that they don’t intimidate its adversaries.
The hawkish speeches from the Governing Council appear to be a voice in the wilderness. Following Austria’s Robert Holzmann, Bank of Latvia Governor Martins Kazaks began promoting the idea of raising deposit rates in September. In his view, it’s better to overdo monetary tightening than to allow inflation to accelerate again. In the first case, the ECB can always reduce borrowing costs. In the second, it will have to sharply raise rates, resulting in a recession.
The problem is that economic downturn risks in the eurozone are beginning to outweigh the probability of a new CPI peak. Money supply in the region shrunk in July for the first time since 2010 due to decreased lending and a withdrawal of deposits from the banking system. This trend is good news for the ECB regarding inflation, but it increases the risks of GDP contraction.
Dynamics of private sector lending in the eurozone
The eurozone’s economy, teetering on the brink of stagflation and recession, to put it mildly, doesn’t assist the EUR/USD bulls. However, the euro is a pro-cyclical currency. Typically, it gains preference when global economic growth accelerates. The eurozone doesn’t necessarily need to be thriving. What’s essential is that other giants, like the U.S. and China, pick up the slack. In this regard, the robust U.S. provides the necessary buffer for the main currency pair. Unfortunately, it’s not enough. China continues to disappoint.
Bloomberg experts lowered their GDP growth forecast for China in 2023 from 5.2% to 5.1%, which is very close to the government’s target of 5%. The primary challenges, in their opinion, will arise in the third quarter. They expect the GDP in July–September to expand by 4.4%, not the previously forecasted 4.6%. China’s economy is expected to grow by 4.5% in 2024, down from the previous 4.8% prediction.
China’s GDP forecasts
In summary, both the eurozone and China are on shaky ground. This doesn’t allow EUR/USD to gain momentum. Moreover, chances of the federal funds rate rising to 5.75% by the end of 2023 exceed 50%. The Federal Reserve’s dovish pivot is expected in June, not March. Such an urgent market situation, combined with the highest bond yields in over a decade, allows the U.S. dollar to feel right at home.
Technically, the EUR/USD bulls’ attempt to counterattack fell flat. Buyers couldn’t leverage the internal bar and reach even the EMA. A return of the pair’s quotes to the pivot level at 1.0795 and its breakdown may lay the foundation for selling.
The material has been provided by InstaForex Company – www.instaforex.com
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