Could the ECB potentially upgrade its 2024 inflation forecast in the EUR/USD forecast?

13 September 2023, Wednesday
Could the ECB potentially upgrade its 2024 inflation forecast in the EUR/USD forecast?

The Euro’s Recovery and Upcoming Challenges


Euro’s Late Recovery


The Euro made a comeback yesterday, thanks to the weakening Dollar Index (DXY) as the day progressed. Additionally, sources suggest that the European Central Bank (ECB) is planning to upgrade their inflation outlook for 2024 to above 3%. This news led to a more optimistic view on future rate hikes by the ECB. European Commission President Ursula Von Der Leyen also mentioned that it will take time to reach the ECB’s inflation target.


Retracement in EUR/USD


This morning, we are seeing a slight drop in EUR/USD as the Dollar Index (DXY) has started the day strong. Could this decrease be a sign of potential Dollar weakness later in the day?


Challenges for the ECB


The ECB is facing a dilemma as they plan to upgrade rate hike expectations while the Euro Area economy continues to struggle. Recent data from Germany, Europe’s most industrialized economy, has raised concerns among economists. The ECB wants to raise rates tomorrow, which would be the 10th consecutive rate hike, but the worsening economic conditions in the Euro Area pose a challenge. It is uncertain whether the hike will happen, especially considering the impact of rising oil prices on inflation.


US CPI Data and FED Meeting


Later today, the US CPI data will be released, which is the last inflation report before the upcoming FED Meeting. Higher energy prices are expected to contribute to an increase in headline inflation, potentially strengthening the Dollar. Market participants believe that the Federal Reserve will keep rates steady next week, with a possible hike in November. However, the resurgence in oil prices may also influence the FED’s decision.


Upcoming Risk Events


Two significant events to watch out for are the US CPI data and the ECB Interest Rate Announcement, which seem to be on opposite ends of the spectrum. US inflation is expected to remain high, supporting the USD, while the likelihood of an ECB rate hike tomorrow is uncertain.


Possible Euro Rally


If the ECB decides to pause the rate hike tomorrow but maintains a hawkish outlook, there is a chance that the Euro may still rally afterward. This outcome wouldn’t be surprising since the market is still pricing in an 80% chance of one more rate hike from the ECB in 2023. The next two days will be crucial for EUR/USD as we approach the end of Q3.


Technical Perspective on EUR/USD


Looking at EUR/USD from a technical standpoint, we have seen a bounce off a key support level around the 1.0680 mark, which was a strong support area in June. There is still a possibility of further downside today, especially if the US CPI data strengthens the USD. A significant support level to watch is 1.0680, and if it breaks with a daily candle close below, it could lead to a retest of the psychological level of 1.0500. However, the ECB rate decision tomorrow may complicate this narrative, potentially leaning towards a more hawkish stance.


In conclusion, the technical outlook for EUR/USD may become clearer after the next two days of data releases, as we approach Q4.