ECB to Upgrade 2024 Inflation Forecast?

EUR/USD PRICE FORECAST:

If you are a beginner trader, make use of our resources and download your free guide now

WEEKLY FORECAST: Japanese Yen Selloff Resumes: USD/JPY, EUR/JPY Eye Further Upside

The Euro staged a late recovery yesterday helped by a waning Dollar Index (DXY) as the day progressed. This was compounded by sources who suggest the ECB are about to upgrade their inflation outlook for 2024 to above 3% which saw a hawkish repricing of rate hike expectations from the ECB. This rhetoric has been echoed by comments from European Commission President Ursula Von Der Leyen this morning who stated that returning to the ECB inflation target is to take time.

This morning we are seeing a slight retracement in EURUSD as the Dollar Index (DXY) has started the day on the front foot. Is this drop a precursor for Dollar Weakness later in the day?

Currency Strength Chart: Strongest – USD, Weakest – GBP.

Source: FinancialJuice

ECB RATE HIKE PROJECTIONS AND US CPI DATA

News that the ECB are planning to upgrade rate hike expectations pose a headache from the Central Bank as the Euro Area economy continues to stutter. Yesterday we had ZEW data out with economist particularly concerned about Europe’s most industrialized economy, Germany. The ECB it would seem would like to hike rates tomorrow in what would be a 10th successive rate hike but the worsening economic conditions in the Euro Area pose a challenge. It seems to be 50/50 at this stage whether we get a hike tomorrow with the rise in oil prices likely to factor in as well. The fear might be that persistently high energy prices may eventually bleed into inflation increasing the likelihood of second round inflationary pressures.

The US CPI data is due out later today and will be the last inflation print before next weeks FED Meeting. It’s an interesting one with higher energy prices likely to see an uptick in headline inflation which in theory should keep the Dollar bid. Market participants appear convinced that the Federal Reserve will hold rates steady next week with a view to a possible hike in November. Will the resurgence in oil prices also weigh on the FED decision at next week’s meeting?

Tips and Tricks to Trading EURUSD? Download the Guide Now

RISK EVENTS AHEAD

From a risk event perspective there is US CPI and the ECB Interest Rate Announcement tomorrow which at this stage appear to be on different ends of the spectrum. US inflation is expected to be sticky and thus keep the USD supported while it is now a 50/50 bet on whether the ECB hike on rates tomorrow.

If the ECB pause tomorrow with a hawkish outlook there is a chance the Euro may still rally in the aftermath. It would not come as a complete shock as markets are still pricing in around an 80% chance of one more rate hike from the ECB in 2023. The next two days could be crucial for EURUSD as the end of the Q3 approaches.

For all market-moving economic releases and events, see the DailyFX Calendar

TECHNICAL OUTLOOK AND FINAL THOUGHTS

Looking at EURUSD from a technical perspective and we have bounced off a key area of support around the 1.0680 mark which served as a strong area of support in June. Further downside remains possible today with the US CPI print potentially serving as a catalyst for further USD strength.

A push lower here has that key support level of 1.0680 to contend with, with a break and daily candle close below opening up a possible retest of the 1.0500 psychological level. This narrative could prove challenging given the ECB rate decision tomorrow which may tilt toward the hawkish end of the spectrum.

All in all, the technical picture looks set to be clouded by the next two days of data releases after which the outlook on EURUSD from a technical standpoint may begin to clear up as Q4 approaches.

EUR/USD Daily Chart – September 13, 2023

Source: TradingView

IG CLIENT SENTIMENT DATA

IGCS shows retail traders are currently Net-Long on EURUSD, with 63% of traders currently holding LONG positions.

To Get the Full IG Client Sentiment Breakdown as well as Tips, Please Download the Guide Below

Written by: Zain Vawda, Market Writer for DailyFX.com

Contact and follow Zain on Twitter: @zvawda