No one wants to buy the euro. Despite several positive signals from Asia and Europe, the EUR/USD bulls have been unable to sustain levels above the 1.072 red line. The major currency pair fluctuates around this level as investors are well aware that opening positions ahead of the release of U.S. inflation data is akin to a death sentence. Moreover, the ECB meeting is on the horizon, and even the members of the Governing Council are uncertain about its outcome.
According to Bloomberg's inside information, both hawks and centrists within the European Central Bank are unsure about their stance on interest rates. The hawks will advocate for an increase in borrowing costs due to excessively high core inflation. Meanwhile, the centrists will refer to the weakness in the Eurozone economy and the delayed effects of monetary tightening.
Dynamics of European inflation
The futures market assesses the probability of a deposit rate hike to 4% at 45%. These odds have increased from 30% in the past week due to hawkish rhetoric from Dutch central bank president Klaas Knot. Knot stated that the market underestimates the probability of continuing the cycle of monetary tightening.
Clearly, there is a divide within the Governing Council. Interestingly, the most problematic economies, Germany and the Netherlands, are represented by the hawks. On the other hand, Spain, which is doing relatively well, will insist on maintaining the previous parameters of monetary policy.
Even positive news from Asia and Europe is not helping the euro. The People's Bank of China conducted its most aggressive verbal intervention in years, stating its readiness to interfere in the Forex market to rein in speculators. Investor confidence in the German economy, as measured by the ZEW institute, improved for the second consecutive month in September. Despite the positive trend, the indicator remains below the long-term average.
Dynamics of investor confidence in the German economy
Thus, the euro prefers to ignore good news, as investors are reluctant to rush into the unknown. The outcome of the U.S. inflation data is uncertain, and the market's reaction is equally unpredictable.
Bloomberg experts forecast an acceleration in consumer prices from 3.2% to 3.6% in August, increasing the likelihood of the Fed continuing its monetary tightening cycle and supporting the U.S. dollar. At the same time, core inflation may slow down from 4.7% to 4.3%, providing a strong argument for maintaining the federal funds rate at 5.5%.
Following the important U.S. statistics, the results of the ECB meeting will be announced. The situation there is also shrouded in uncertainty. Can you catch a fish in muddy waters? Most investors believe it's impossible and prefer to stay out of the market. Let's wait and see.
Technically, the battle for the 1.072 red line, also acting as a pivot level, continues. It changes hands from the EUR/USD bulls to the bears and back again. Without a clear picture, it makes sense to refrain from opening positions. The recommendation is to stay out of the market.
