EUR/USD Faces Setback as ECB Doves Signal End of Tightening Cycle

Unraveling the Dollar Rally: Assessing the Factors Behind the Surprising Rebound and Market Dynamics

EUR: ECB doves are landing punches

EUR/USD suffered quite a sharp setback on Friday after Bank of France Governor, Francois Villeroy de Galhau, said that barring shocks, the ECB tightening cycle was over and that the ECB would consider the question of easing in 2024. Money markets price the first full ECB cut by next April - marginally earlier than the Fed. This was always the risk that the ECB would be cutting at a similar magnitude to the Fed in 2024 - meaning that EUR/USD did not need to rally much. That is why our EUR/USD quarterly profile in 2024 is still quite modest - 1.10 for 2Q24, 1.15 for 4Q24 and why we have favoured short positions in cross rates like EUR/AUD - which has fallen 2.5% over the last couple of weeks.

This week sees some second-tier eurozone data (Sentix, retail sales, final 3Q23 GDP revisions) but also ECB speakers including President Christine Lagarde at 15CET today.  She will probably try to keep the peace between the hawks and the doves by suggesting a further rate hike is still on the table. 

1.0825 now looks good intra-day support for EUR/USD. We suspect that it would have to take a very strong payrolls report to see EUR/USD trade 1.0700 again. But then the euro can remain soft on the crosses for the time being.

Also today, look out for some updates on Riksbank thinking; the minutes of its November meeting are released at 0930CET. We described this meeting as a hawkish hold.  This is followed by a speech from Riksbank's Anna Breman at 11CET.

Unraveling the Dollar Rally: Assessing the Factors Behind the Surprising Rebound and Market Dynamics

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