The market is starting to look towards next week's ECB meeting

Market attention is starting to focus on next week's meetings of major central banks. Next year we will know the decision of the ECB and Canada, next year it will be time for the Fed. In recent days, we have heard many voices from representatives of these institutions. Policymakers had a goal cooling down excessive market expectations regarding interest rate cuts, which was successful to some extent. Weekly data from the US showed the strength of the labor market again. As a result, the dollar appreciated and the yields of American bonds increased.

The market thinks otherwise...

The economic forum in Davos is underway. Christine Lagarde and some of her colleagues signaled that the first possible downward move on the feet is possible in the summer. An earlier decision is rather unrealistic, even though the market thinks otherwise. At next week's meeting The ECB is unlikely to change its position. Of course, the institution is probably concerned about the development of the economic situation in the euro area. On the other hand, he also sees a risk of inflation growth, which is why he wants to avoid too hasty actions. Central banking representatives prefer to wait a little longer and be more certain that inflation will actually and permanently return to the 2% target.

Although yields have risen slightly again in recent weeks, they are still well below the highs seen last fall. Financing conditions are therefore still more favorable than some time ago, which should help the economy. In this context, caution seems most likely EBC at the first reductions in interest rates. There are no more important macro data before next week's meeting, so the picture of the economic situation will not change much.

Double bottom on the chart

Returning to the USA, yesterday we learned the weekly data from the labor market. The number of applications for unemployment benefits has dropped at the lowest level since September 2022 (187k) This means that the labor market is still strong. The reaction on the dollar was visible. EUR / USD leveled Wednesday's lows and lowered its rate to 1,0846, but in the afternoon and evening the quotations approached 1,0890 once again. Currently, the main currency pair is declining and at the time of writing this comment it indicates a ceiling of 1,0870.

It should be taken into account that the eurodollar correction at this point is similar in terms of range to the downward movement from the first half of December 2023. I can imagine such regularity of quotes. A negative signal is that the rate is still below the medium-term upward trend line. The chart shows a double low pattern (yesterday's and Wednesday's lows), which suggests that soon we may see a bit more of a rebound above 1,09.

Source: Łukasz Zembik, OANDA TMS Brokers