The EUR/USD pair is trading close to 1.0900, looking to build on Wednesday’s strong rebound after the Federal Reserve (Fed) hinted at rate cuts. Now, all eyes are on the European Central Bank (ECB) as they prepare to announce their decision.
EURUSD Daily Chart
ECB Policy Decision and Projections
Following the Fed meeting, the EUR/USD pair rallied over 100 pips to the 1.0900 area. The momentum remains bullish, fueled by the US Dollar’s decline. The Fed kept interest rates unchanged during the meeting but projected multiple rate cuts in 2024. This prompted a rally in US bonds and a drop in the US Dollar Index.
The ECB is expected to keep interest rates on hold for the second consecutive meeting. Discussions regarding PEPP reinvestment and the Minimum Reserve Requirement may take place, but no decisions are expected yet. ECB President Christine Lagarde will deliver a press conference, and updated staff macroeconomic projections will be released. A downgrade in inflation and growth forecasts is anticipated.
Focused on ECB’s Actions in 2024
Markets are now closely watching the actions of the ECB in the coming year. The expectation of a rate cut in April has been already priced in, which has been weighing on the Euro. Thursday’s meeting will provide further insight into the ECB’s plans, potentially impacting future repositioning.
US Data Releases and Potential Rally
In the US, attention turns back to data releases. The weekly Jobless Claims and Retail Sales reports are due on Thursday. The US Dollar’s decline after the FOMC meeting supports a potential rally back to 1.1000. However, the ECB’s decisions on Thursday or the Eurozone PMIs on Friday could potentially halt the rally.
GBP/USD Advances on Fed Dovish Tone, BoE Rate Decision Ahead
The GBP/USD pair surged to one-week highs above 1.2600, driven by a weaker US Dollar and dovish comments from the Federal Reserve. Investors are now closely watching the Bank of England’s (BoE) interest rate decision as well as the upcoming US Retail Sales data.
Weakening Pound Sterling and UK Economic Data
The UK’s Gross Domestic Product shrank by 0.3% on a monthly basis in October, worse than market expectations. Industrial Production and Manufacturing Production also declined. These disappointing figures caused Pound Sterling to weaken against other currencies ahead of the BoE’s policy announcements.
Impact of Fed’s Policy and Dot Plot on GBP/USD
The Fed is expected to leave its policy rate unchanged, but the revised Summary of Economic Projections (dot plot) may reveal policymakers’ outlook for rate reductions next year. If the dot plot shows a significant rate reduction, the USD could come under bearish pressure, supporting GBP/USD.
Possible Weakness in GBP/USD if Expectations Are Not Met
On the other hand, if the dot plot or Fed Chairman Jerome Powell’s comments go against market expectations for a rate cut in the first half of the year, GBP/USD could weaken. Currently, the markets are pricing in a slightly less than 50% probability of a policy shift in March, according to the CME Group FedWatch Tool.
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