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February 5, 2024

EUR/USD Outlook

Explore last week's market dynamics, from the limited impact of the ECB meeting and more. We give our EUR/USD outlook. We maintain a bearish forecast. Read why!

Last week, the EUR/USD fluctuated within the range of 1.0796 to 1.0932. The European CentralBank (ECB) meeting, held during the same period, did not provide significant momentum. TheECB maintained its key interest rates unchanged, and Christine Lagarde, the ECB President, offered statements that could be interpreted in various ways. Lagarde did provide clarity on one aspect, stating that the release of the results from the review of the ECB's monetary policy framework is likely to face further delays. The ECB is expected to comment on this matter by the end of spring. Subsequently, diverse opinions emerged from various central bankers in the following days. The Portuguese representative, Centeno, suggested an earlier initiation of interest rate cuts to prevent abrupt movements, while the Slovakian representative, Kazimir, deemed any discussion of interest rate cuts as premature.

Between the ECB's interest rate decision and the ensuing press conference, the US gross domestic product (GDP) for the fourth quarter was released. Analysts' expectations of a 2.0%GDP rise were surpassed, as the US Department of Commerce reported a growth of 3.3%. This unexpected resilience in the US economy led to a gradual strengthening of the US dollar over the subsequent trading days.

In the realm of international affairs, an attack on a US military base in Jordan resulted in the deathof three American soldiers, escalating tensions in the Middle East. President Joe Biden expresseda clear stance on the incident, vowing a robust response against those responsible. Thisescalation poses a significant challenge for Biden, especially in an election year, where theimperative is to avoid further escalation.

Meanwhile, a Hong Kong court ordered the liquidation of China's largest property group,Evergrande, which had been granted a stay in December due to high indebtedness. The judgeemphasized that creditors' interests would be better protected through court-ordered dissolution,allowing independent liquidators to assume control. The current debt of Evergrande is reported atUSD 300 billion, and the acceptance of the Hong Kong order in the rest of China remainsuncertain due to differing jurisdictions.

Furthermore, the latest data from the ECB Lending Survey suggests a potential resurgence incredit demand at the turn of the year. Banks anticipate a slight increase in demand for corporateloans and home loans in the spring, marking a departure from the prolonged decline. However,the trend of declining demand for consumer loans is expected to persist. While lending standardshave tightened, the pace of this tightening is projected to be more moderate compared toprevious quarters.

  • ECB Meeting Impact: The ECB meeting and related statements did not provide a significantmarket catalyst for the EUR/USD pair. Lagarde's comments on the delayed release of themonetary policy framework review results could introduce uncertainty.
  • US GDP Surprise: The unexpected growth in the U.S. GDP for Q4 may have contributed to thestrengthening of the U.S. dollar. A resilient U.S. economy can attract capital and influence therelative strength of the USD.
  • Geopolitical Tensions: Escalating tensions in the Middle East could introduce an element of riskaversion, potentially benefiting the U.S. dollar as a safe-haven currency.
  • Evergrande Liquidation: The Hong Kong court's decision to liquidate Evergrande, a majorChinese property group, adds an element of uncertainty to financial markets. It could impactrisk sentiment and potentially influence the USD's strength.
  • ECB Lending Survey: The potential increase in credit demand in the Eurozone suggested by theECB Lending Survey may be a positive signal for the euro. However, it depends on variouseconomic factors and how they evolve.

At this stage we maintain a bearish outlook on EUR/USD.

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