EUR/USD: Dollar scares with silence

While EUR/USD hovers around 1.07, awaiting whether Jerome Powell will say anything about monetary policy in his second speech of the week, ECB officials are trying to warn the markets against excessive bets on the easing of monetary policy in 2024. Derivatives indicate the highest probability of the first rate cut in June, putting pressure on the euro.

Market Expectations of an ECB Deposit Rate Cut

According to Bundesbank President Joachim Nagel, the last mile in the fight against inflation is the most challenging. As long as consumer prices are at such high levels as they are now, discussing a reduction in borrowing costs makes no sense. His colleague on the Executive Board, Isabel Schnabel, believes that bringing CPI down from 10% to 3% is easier than from 3% to 2%. Chief economist Philip Lane sees inflation in 2024 at "high twos" or "low threes." It will only return to 2% in 2025.

Bank of Latvia President Martins Kazaks and Central Bank of Ireland Governor Gabriel Makhlouf believe that the resumption of the monetary tightening cycle should not be ruled out. Consumer prices are uncomfortably high.

Dynamics of Eurozone Inflation and GDP

The "hawkish" speeches of the members of the Executive Board provide support to EUR/USD bulls, but the fate of the pair will be decided not in Frankfurt but in Washington. According to Bank of America, the weakening of the U.S. dollar was due to three factors: the Treasury's announcement of a smaller bond issuance than expected; a series of weak reports from the U.S. economy, and hints from the Fed about the end of the tightening cycle of monetary policy. The central bank is unlikely to influence the first two factors, but Powell's hawkish rhetoric could scare off buyers of the main currency pair.

However, in his first speech this week, the Fed chair did not touch on monetary policy issues. What will happen in the second?

Note that Israel's invasion of Gaza continues, the U.S. presidential campaign is starting, and the problem of the U.S. government shutdown hasn't been resolved. The X date is approaching, which could lead to an increase in demand for safe-haven assets. Primarily, the dollar. The same can be said about geopolitics and the 2024 elections.

According to the dollar smile theory, the USD index rises in two cases: when the U.S. economy heats up, and when American exceptionalism comes into play. When a recession or other financial market turmoil is approaching, investors flee to safe-haven assets. Therefore, reducing the divergence in monetary policy between the Fed and the ECB, and narrowing the gap in economic growth between the United States and the eurozone may not help EUR/USD. However, I remain optimistic and believe that it will help.

Technically, after turbulent movements at the end of the week by November 3, there is consolidation in the EUR/USD dynamics. The struggle for the 1.07 level is ongoing. Breaking resistance at 1.072 should be used as a signal to enter long positions.

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