Euro updated its lows and is likely to continue moving downwards early this week because of the sharp decline in risk appetite, which was prompted by the continued aggressive policy stance of the Federal Reserve. It seems that as much as the US central bank would not like to turn around and start cutting rates, the strong labor market and high inflation are preventing this from happening for the time being. This situation is similar in the eurozone, where last week another price increase in Germany showed policymakers that their fight against inflation is not over yet and that it is too early to talk about victory.
Economists say the current pace of slowing inflation suggests that it will not return to the ECB's 2% target even by 2025 as core inflation will peak this quarter, then will find it difficult to achieve an immediate decline thereafter. It is expected to hit 5.2% in Q1 and then fall to 3.6% in the last three months of the year. As for the quarterly forecasts, the ECB will revise them as there is a recent drop in natural gas prices caused by weather conditions.
Back in November and December last year, the ECB did not see core inflation falling to 2.4% until 2025. Thus, they continued aggressively raising interest rates, opting for another 0.5% rise this February. ECB President Christine Lagarde explained that the European economy is doing a fine job, which is why they could afford to be hawkish about monetary policy.
With regards to GDP, many see a 0.2% contraction in Q1. But it will be up 0.4% in 2023 and 1.2% in 2024. Germany is the only economy among the four biggest eurozone countries to contract this year. Spain, meanwhile, is expected to show the highest growth rate.
The ECB is expected to raise its key rate to a high of 3.25%, which means that there will be another 50 basis points increase in March and a quarter-point increase thereafter. The first rate cut is scheduled for the second quarter of 2024.
Talking about the forex market, pressure in EUR/USD remains high, so to stop the bear market, buyers need to show themselves above 1.0650 as that will spur a rise to 1.0690, 1.0720 and 1.0760. If they fail, the quote will fall further to 1.0600 and 1.0565.
In GBP/USD, the bulls have practically lost all the advantage they had at the end of last week, so to regain control, they need to climb above 1.2070. Only the breakdown of this resistance will prompt a rise to 1.2130 and 1.2180. But if the bears gain control of 1.2015, the pair will go back to 1.1960.
