The EUR/USD exchange rate experienced a test of new monthly lows on Tuesday, reaching 1.0822. This depreciation of the euro was attributed to speculation surrounding the European banks' increasingly lenient stance towards borrowers.
The quarterly report from the European Central Bank (ECB), known as the Bank Lending Survey, revealed that European banks are no longer tightening credit conditions. This shift is expected to result in a surge in demand for loans and credit, accompanied by a more accommodating approach from the European Central Bank.
Despite the ECB's recent hawkish statements, there are indications that it is preparing for interest rate cuts. Consequently, investors are once again following the pattern of a stronger dollar and a slightly weaker euro, allowing the dollar to potentially continue strengthening in the first quarter of 2024, despite a correction observed today.
The situation on the EUR/USD chart remains highly variable. While the European Central Bank may not be in a hurry to lower interest rates, the overall condition of the European banking sector suggests that the most challenging times regarding credit availability are likely behind us.
Helen Given, an analyst at Monex USA, asserts that "markets increasingly believe that PMI indicators for the eurozone will continue to signal a contracting economy. Thus, the ECB may be forced to cut interest rates earlier than the Fed, which would likely pull EUR/USD southward."
The expert further believes that the United States may avoid a recession, as incoming data continues to demonstrate the resilience of the American economy. Consequently, Given anticipates that EUR/USD may decline to approximately 1.07 dollars in the coming weeks, aligning with the December consensus of investment banks projecting a stronger dollar in Q1 2024.
Despite the EUR/USD pair counteracting yesterday's sell-off during today's session, sellers still dominate the market.
The dollar is experiencing significant weakening due to the risk-on sentiment among global investors, triggered by China's announcement of a reduction in reserve requirements for banks. However, this move is considered temporary and might be viewed as a fleeting glimmer of hope in an otherwise uncertain economic environment.
Increasingly, it appears that investors have once again been misled by their own expectations. The formal acknowledgment of the end of the Federal Reserve's previous interest rate hike program at the December meeting led the market to declare the conclusion of the tightening era and the long-awaited pivot.
However, the challenge lies in the fact that representatives of the Federal Reserve have not yet made their final pronouncements regarding the ongoing battle against inflation. Consequently, the market's scenario of as many as seven full interest rate cuts of 25 basis points each seems highly improbable.
Christopher Waller's recent speech from the Federal Reserve last week had a profound impact, causing a significant dampening of sentiments in global markets.
Moreover, the potential for oil prices to spike remains a constant concern. This is primarily due to the escalating conflict in the Middle East and reduced supply resulting from measures such as OPEC+ production cuts.
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