No matter how much Christine Lagarde tried to convince investors of the ECB’s determination, the markets did not listen to her much. They drew attention to the accompanying statement, which caused a EURUSD correction. Let’s discuss this topic and make up a trading plan.
Weekly Euro fundamental forecast
Markets have stopped believing central banks. After the February meetings of regulators, they were convinced that the monetary tightening cycle would soon end. No matter how much Jerome Powell, Christine Lagarde, and Andrew Bailey say that the work has not yet been done and inflation has not been defeated. The fall in European bond yields and the expected peak rates of the Bank of England and the ECB triggered the EURUSD correction.
It seems that the principle of Wall Street “don’t go against the Fed” in 2023 transformed into “don’t go against the markets.” After Jerome Powell reacted to investors’ disagreement with the FOMC’s December forecasts with the phrase “we need to see,” stock indexes rose sharply. When the cycles of monetary restrictions are coming to an end and everyone is relying more and more on data, the speeches of the heads of central banks are perceived as empty chatter.
Cycles of monetary restrictions
Source: Reuters.
A typical example is the Bank of England. Its head tried in every possible way to support the idea of a further rate hike after it rose by 50 bps in February, but the markets thought otherwise. They preferred the updated BoE forecasts more, according to which inflation in the UK will fall to 4% in 2023 and return to the 2% target in 2024. Why raise the borrowing cost so high? The estimated interest rate ceiling reduction from 4.5% to 4.25% caused the pound’s decline.
The same thing happened with the euro. Christine Lagarde promised that the ECB will support the rate, that its work has not yet been done, and monetary tightening in Europe in the coming months will go faster than in the US. She claimed that the central bank was catching up. Alas, the markets did not hear her speeches. They were more excited by the phrase in the accompanying statement that the further direction of monetary policy will be determined after March. According to ING, there will soon be a pause, and possibly the end of the cycle. As a result, the peak of the deposit rate expected by derivatives shifted from 3.4% to 3.25%, which contributed to the EURUSD decline.
Rates dynamics of the world’s leading central banks
Source: Financial Times.
Thus, the markets no longer believe in central banks but focus on forecasts, texts of accompanying statements, and macroeconomic data. In this regard, the release of the US jobs report for January seems to be a more significant event than the meetings of the Fed and the ECB, although one should not expect the same violent reaction from the market.
Weekly EURUSD trading plan
It is expected that unemployment will rise slightly from the levels of the 50-year bottom, wage growth will continue to slow down, and the increase in employment by 190 thousand will be the smallest in two years. Weak data may scare the markets with a recession, while the S&P 500 fall will provoke the EURUSD correction. However, if the levels of 1.0865, 1.082, and 1.08 are not broken out, entering long trades will be possible.
Price chart of EURUSD in real time mode
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