Written by: Rania Gule, Senior Market Analyst at XS.com – MENA
The EUR/USD pair has recently experienced a noticeable decline, approaching the 1.0935 level during early trading hours on Wednesday, under the pressure of the U.S. dollar’s recovery, which benefited from strong U.S. economic data released in recent days. The data from the Federal Reserve showed that U.S. industrial production rose by 0.7% in February, surpassing expectations, which had predicted only a 0.2% increase. Although this improvement in U.S. economic performance was not decisive enough to significantly change the course of monetary policies, it supported the dollar and contributed to the downward pressure on the pair.
Currently, market expectations indicate that the Federal Reserve will keep interest rates unchanged in its meeting scheduled for Wednesday, a decision that will remain a key focus for the markets. Investors expect the Federal Reserve to remain cautious in taking any new steps regarding rate hikes amid ongoing concerns about inflation and economic uncertainty.
In my opinion, the press conference and the Federal Reserve’s economic projections will be crucial in determining future policy directions, especially if there are signs of economic trends that might influence the Fed’s decisions in upcoming meetings. If the Federal Reserve signals a preference for maintaining the current interest rate policy, this could put pressure on the U.S. dollar, allowing the euro some room for recovery.
The euro also received some support due to positive economic developments in Germany. The German parliament’s approval of a plan to significantly increase spending will contribute to stimulating the German economy after years of economic challenges. From my perspective, these plans are likely to boost investor confidence in the European currency, especially given the optimism surrounding Europe’s largest economy. Although this data was not enough to push the euro to significantly higher levels, it helped the pair test the 1.0950 level again.
On the other hand, there is a sense of anticipation in the markets, with traders preferring to wait and refrain from making significant decisions ahead of the Federal Reserve’s rate decision. While U.S. economic data may support the dollar in the short term, the markets expect the Federal Reserve to remain cautious in its decisions, contributing, in my view, to a sense of caution and wait-and-see behaviour in global financial markets. Investors will also be closely monitoring the upcoming European Central Bank meeting and the stance of ECB President Christine Lagarde on monetary policy in the eurozone.
As for European economic data, the final numbers for the Harmonized Index of Consumer Prices (HICP) are due to be released on Wednesday. Although expectations suggest no significant changes in this data, any surprises could impact the euro’s movement. If the numbers come in higher than expected, it could strengthen the European Central Bank’s position in favour of future rate hikes, thus supporting the euro. However, if the figures come in lower than expected, this could prompt the ECB to reassess its monetary policies.
Regarding the U.S. dollar, markets largely expect the Federal Reserve to keep interest rates unchanged in its next two meetings. While these expectations foster optimism in financial markets, any surprises from the Federal Reserve could quickly change the course of the market, especially if there is a sudden shift in the Fed’s outlook on inflation or economic growth.
Therefore, I believe that the next price movement for the EUR/USD pair will remain influenced by multiple factors, ranging from the Federal Reserve’s decisions on interest rates, through U.S. and European economic data, to statements from ECB officials. If the Federal Reserve decides to keep interest rates steady, the U.S. dollar may maintain its dominant position, pressuring the euro to continue its decline below 1.0950. However, if the Federal Reserve surprises the market with comments indicating the possibility of a rate cut, this could reignite momentum for the euro, and we may witness a recovery for the European currency to higher levels.
Overall, I expect that the movement of the EUR/USD pair in the near term will largely depend on how the Federal Reserve handles inflation and growth expectations in the U.S. economy. If the U.S. dollar continues to benefit from strong economic data, the pair may face additional pressure in the short term. The euro’s outlook remains tied to new European economic developments that could influence its performance, whether through data results or central bank moves.