On Wednesday, the European Union unveiled a report on industrial production, revealing a 1.1% decrease in volume for September on a monthly basis. The market, anticipating this scenario, exhibited little reaction to the report. Interestingly, a similar preparedness for US inflation to dip to 3.3% the day before resulted in a robust and somewhat exaggerated market response.
According to JP Morgan, the market's reaction was an overreach. The Federal Reserve takes a holistic view of data and won't base decisions on a single report. While this stance seems reasonable at first glance, it contrasts with JP Morgan's earlier assertions about the continuation of the Fed's monetary tightening cycle, predicting a potential rise in the yield on 10-year Treasury bonds to 7%.
Despite JP Morgan's call to avoid overreacting to short-term data, combined with the EU's dimmer economic outlook for the Eurozone and the pound's weakening after UK inflation data release for October, EUR/USD bulls took a step back. However, the bears' counterattack appears feeble and may fizzle out before gaining momentum. To assess the market sentiment, a volume indicator can be of great help.
The euro faced downward pressure due to a reported slowdown in consumer price growth from 6.7% to 4.6% in October. This led to a shift in forecasts for the Bank of England's repo rate reduction from August to June, causing the pound to weaken. Investors were reminded that central banks worldwide find themselves in a similar position, having concluded their monetary restriction cycles and likely moving towards stimulus in the future.
Yet, the dollar remains a focal point. As the primary currency in Forex transactions and with a two-year streak of growth in the USD index, it's no surprise that all eyes are on the Fed and American macro statistics. The surge in bullish bets on the dollar prompted a mass closure of speculative positions, catalyzing the EUR/USD surge after the release of US inflation data for October.
The euro faced headwinds from the European Commission, which revised down the GDP growth forecast for the currency to 0.6% from 0.8% for 2023 and to 1.2% from 1.6% for 2024. This adjustment was attributed to increased price pressure, aggressive ECB rate hikes, and weak demand from abroad.
Despite this, the current EU assessment remains higher than that of the ECB. Bulls in the major currency pair may find comfort in the expectation that the economic growth disparity between the US and the Eurozone will likely diminish, providing a favorable environment for the euro.
This article was written in cooperation with TradingView