EUR strong performance is likely to continue after the ECB
The EUR performance has fluctuated against the USD in 2023. However, its broad strength amongst major currencies continues.
The European Central Bank (ECB) is expected to hike the deposit rate again at the Governing Council monetary policy meeting on Thursday 16th March. Once the dust settles on the meeting volatility, we believe that the EUR will continue to outperform.
- ECB is ready to hike by 50bps: A 50bps hike on Thursday with more to come is likely
- Falling European gas prices support the Eurozone economy: Eurozone growth forecasts have been upgraded
- The strength of the EUR: The EUR continues to perform well in the face of significant USD strengthening
- Technical analysis of EURXXX crosses remains positive: The outlook for EUR/JPY and EUR/AUD remains positive
A 50bps hike by the ECB is a given, but what then?
At the February announcement of the ECB’s monetary policy, President Lagarde all but confirmed that another 50bps hike would be coming in March.
The deposit rate currently sits at 2.50% and another hike to 3.00% is nailed on. Although the ECB is behind the rate hikes of the Federal Reserve, the Reserve Bank of Australia and the Bank of Canada, it is not too far behind.
A 50 basis points hike is a given, but what beyond that? Markets will be looking for any key clues over how many hikes are still to come.
Aggressive rate hikes could continue
One Governing Council member, Robert Holzmann (Austria) recently discussed wanting +0.50% rate hikes at every meeting until July (that’s four successive hikes). He argues that “core inflation will not weaken significantly in the first half of the year”.
It is important to understand that Holzmann is one of the most hawkish members of the Governing Council and his views are not the mainstream.
However, the ECB hawks, such as Isabel Schnabel are powerful voices on the Governing Council right now. The ECB hiking rates increasing to around 4.00% by the middle of the year should be seen as being out of the question. Another 100 to 150 basis points of hikes are likely.
Inflation remains a crucial issue for the ECB
As Holzmann argues, sticky inflation is a problem.
The recent inflation data for February showed that inflation trends are not turning lower for several Eurozone countries. Inflation for France, Spain and Germany was expected to fall but instead increased. Eurozone core inflation accelerated up to 5.6%.
Falling gas prices are a key reason behind the decline in headline inflation. However, core inflation continues to rise.
Traders will be watching the update to the ECB staff forecasts on inflation.
Here were the December 2022 projections for the next two years:
- Headline HICP will average 3.4% in 2024 and 2.3% in 2025
- Core HICP will average 2.8% in 2024 and 2.4% in 2025
Falling gas prices should pull headline inflation projections lower for 2024 and 2025. However, if core inflation does not continue to be revised lower then it would be a key signal for continued aggressive hikes.
Falling European gas prices support the Eurozone recovery
Gas prices continue to fall in Europe.
As can be seen in a chart of the Title Transfer Facility (TTF) European natural gas futures, prices have fallen to around €41 (per Megawatt hour), a level not seen since August 2021.
Lower European gas prices help to support household spending in the Eurozone. This is helping to prop up the Eurozone economy in the face of the ongoing inflation pressures.
In February the European Commission increased its projections for Eurozone growth for 2023 to +0.9%, up from the +0.3% projected at the end of 2022.
It would seem that with the ongoing mild winter and supportive government policies, the Eurozone is likely to escape a recession in 2023.
EUR performance remains strong
For now, in forex, the EUR continues to perform well amongst major currencies.
The USD has been strong since the beginning of February. However, amidst this USD strength, the EUR has been consistently one of the stronger performers of major forex.
Notably, the European currencies have been the better performers.
Futures markets continue to push for a stronger EUR. The chart below shows CFTC Net EUR futures continuing to increase. This is helping to sustain the trend higher in the trade-weighted EUR.
We expect that as the ECB continues to hike rates in the meetings to come the EUR will sustain its strong performance.
EUR technicals show a positive outlook on major crosses
The USD remains the standout performer of the major currencies. However, the EUR is holding up relatively well still versus the USD.
Elsewhere, the technical analysis outlook for the EUR remains strong versus the Japanese yen (JPY) and especially against the Australian dollar (AUD).
The EUR bulls are defending against a stronger USD. This is leaving the support of the January low at 1.0480 as a key level to watch in the wake of the ECB meeting.
The technicals show a mild corrective bias on a medium-term basis.
- The price is trading under the 21 and 55-day moving averages
- The daily RSI is consistently under 50
This favours pressure on 1.0480, however, if the ECB meeting drives support for the EUR then a move above 1.0690 could be seen. This would add a more positive bias near term.
This is a EUR cross where the EUR is looking much stronger.
A run of higher lows and higher highs since January, tracked by the rising 21-day moving average leaves a positive outlook.
This is backed by the daily RSI consistently above 50 suggesting that near-term corrections are a chance to buy.
Support at 143.60 will be watched for the ECB meeting, but we favour a break above 145.55 to then test 146.75/147.75 key long-term resistance.
The AUD continues to be one of the worst-performing major currencies, with the EUR one of the stronger ones. This is driving EUR/AUD strongly higher.
A breakout above 1.5980 (the December high) has opened the next resistance at 1.6200 (the February 2022 high) and 1.6335 (August 2021 key high).
The daily RSI is above 70. This may open a volatile period ahead (with possible near-term profit-taking), however, it also reflects the strength of the move.
There is good support between 1.5830/1.5980 which we would look to use any weakness for a chance to buy.
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