ECB Trying to Keep the Euro Supported Despite Faltering ECB Economy
Last week EUR/USD gained traction after the FOMC meeting which sent the USD lower, while this pair broke over the crucial 1.1000 level. The Euro drew further buying interest following the European Central Bank’s (ECB) on Thursday which left interest rates unchanged, driving EUR/USD pair higher, but purchasers couldn’t sustain the gains above the 1.10 level, and on Friday we saw a reversal after certain FED members tried to push back on rate cut expectations.
Markets are anticipating nearly 125 bps in rate cuts by the FED in 2024, although the US economy has been showing resilience in many sectors. The European economy on the other hand is showing increasing weakness, The Ifo business climate was expected to improve slightly this month, but it missed expectations and turned softer instead, showing that investors are not feeling comfortable.
Germany December Ifo Business Climate Index by Ifo – 18 December 2023![DEIFO]()
- Business Climate Index (December): 86.4 points
- Expected: 87.8 points
- Previous (November): 87.3 points (revised to 87.2 points)
- Current Conditions (December): 88.5 points
- Expected: 89.7 points
- Previous (November): 89.4 points
- Expectations (December): 84.3 points
- Expected: 85.9 points
- Previous (November): 85.2 points (revised to 85.1 points)
This report points to further weakness in the European economy, with the Ifo reading showing weak business sentiment in Germany as the year comes to a close. As we approach the end of 2023, this suggests that any imminent rebound is still a long way off. Higher price pressures and sluggish demand conditions remain two major concerns for the German economy, which will force the ECB to turn dovish early next year. Although the ECB is still trying to convince markets that they won’t turn too dovish too soon. EUR/USD is crawling back up, but the climb seems weak.
ECB’s Vasle Commenting on Monetary Policy
- Market pricing for rate cuts is excessive
- Market pricing for both start of rate cuts and totality of cuts in 2024 is excessive
- Recent accommodation priced into rates is inconsistent with policy stance to get inflation back to target
- Inflation will rebound in 1H 2024 and ECB should only reassess policy outlook after this period
- Wage formation in Q1 2024 will be crucial for policy outlook
This is a continuation of the pushback that began on last wee’s meeting, but the market is having none of it. Current pricing indicates a 57% probability of a rate decrease in March, with 38 basis points of rate cuts priced in for April. Rate decreases totaling 154 basis points are currently factored in for next year.
EUR/USD Live Chart
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