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EUR/USD pumps to 9-mth highs amid ECB expectations

It looks like another bullish week for the shared currency as markets continue to price in hawkish ECB and dovish Fed.

The single currency continued to capitalize on the broad USD weakness, also reinforced by hawkish comments by ECB government officials. As a result, at the time of writing, the pair traded above 1.09 for the first time since April 2022.

Are ECB hawks getting stronger?

Klaas Knot, a member of the governing council of the European Central Bank (ECB), predicted that interest rates would increase by half a percent in February and March and keep increasing in subsequent months.

Policymakers saw Knot as a hawk, and his remarks were interpreted as a pushback against recent rumors that the ECB might cut down to quarter-point increments beginning in March. A Reuters poll of economists predicted an increase of 50 basis points in March and a maximum of 3.25% in the eurozone.

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This week, many ECB policymakers are scheduled to make public appearances before entering their customary blackout period on Thursday. Then, on February 2, the central bank will conduct its next policy meeting.

Fabio Panetta, a member of the ECB board, is due to address the European Parliament on Monday. His speech will follow Christine Lagarde’s statement that the ECB will “keep the course” with its recent aggressive interest rate rises. Despite the hope that inflation may have stabilized, Lagarde stated at the World Economic Forum in Davos that Eurozone prices are “far too high.”

US macro data to weaken USD

Thursday’s release of US fourth-quarter GDP figures is the main focus of this week. The report is likely to reveal a significant deceleration in growth compared to the previous quarter, signaling a probable recession in the world’s largest economy as the impact of tight monetary conditions becomes evident.

Moreover, on Friday, the Bureau of Economic Analysis (BEA) will also issue its Personal Consumption Expenditures (PCE) Price Index for December, delivering the most recent inflation data. In December, PCE prices likely increased by only 0.1%, down from 0.4% in November.

Price growth likely slowed to 5.1% on an annual basis, down from 5.5% in November and a recent record of 7% in June. Excluding food and energy expenses, core prices are predicted to have increased 4.4% annually, down from 4.5% in November.

A lower-than-anticipated figure might push Federal Reserve officials to vote on a 25-basis-point interest rate increase at the forthcoming FOMC meeting beginning on January 31.

Uptrend remains intact

The single currency continues in its uptrend against the greenback, with the next target at the upper side of the bullish channel, currently near 1.11.

However, there is still a notable bearish divergence between the price and the RSI indicator, suggesting that the bullish momentum might not be strong enough for another push higher.

Therefore, a correction could occur shortly, likely toward the lower line of the bullish channel near 1.08.

EUR/USD daily chart

EUR/USD daily chart, source: author´s analysis, tradingview.com

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