Yesterday, the Wall Street exchange was closed. Americans were celebrating Martin Luther King Day. The EUR/USD fell overnight towards 1.0910, marking its lowest level since January 5. In Europe, stocks fell and bond yields rose after a representative of the ECB dismissed the possibility of quick interest rate cuts, even as the German economy shrank by 0.3 percent in 2023. Oil prices fell yesterday, but reversed due to events in the Middle East. Meanwhile, gold gained in Monday’s session, but falls are now dominating. An ounce currently costs around 2045 USD.
Yesterday, a speech was given by one of the members of the ECB’s Board of Governors, Robert Holzmann. He stated that the enduring inflation makes it impossible for the ECB to lower interest rates this year, even if a recession can no longer be ruled out. Meanwhile, Joachim Nagel from the same institution suggested that the summer may be the right time to consider lowering borrowing costs. They join other bank representatives (Christine Lagarde, Constantinos Herodotou, Philip Lane) in warning that it is too early to talk about rate cuts in the coming months. At the moment, the OIS market prices in an almost 80 percent chance that the cost of money in the Eurozone will be reduced by 25 basis points by April, and assumes a total of over 140 bp reductions by the end of 2024.
In my opinion, the market is overly optimistic regarding the timing of the first decision to loosen monetary policy. Everything will depend on the data so attention will now be focused on Wednesday’s final inflation reading from the Eurozone. Today, we received German results. The CPI and HICP year-on-year indicators rose as expected to levels of respectively 3.7 and 3.8 percent. On a monthly basis, they were also up, to 0.1 percent from -0.4 percent (CPI) and to 0.2 percent from -0.7 percent (HICP).
Yesterday, investors learned how the German economy had fared. It contracted by 0.3 percent last year, which was widely expected. Other data also indicates a weak state of our Western neighbour. Sentiment indicators such as the Ifo business climate remain in recession territory. The recent drop in the number of new orders is having an increasing impact on industrial production. Studies suggest that companies largely fulfilled backorders from the pandemic period. Meanwhile, industrial production also shows a downtrend. All this suggests that the German economy is likely to contract further in the first quarter. Despite the hawkish ECB comments, the EUR/USD did not gain in value. Daily lows were made just below 1.0940, and this morning the decline extends with the 1.09 support level “breaking”.
Overnight and this morning, oil gained, continuing to recover after yesterday’s falls. This is the aftermath of events in the Middle East. Houthi fighters struck a US-owned commercial ship with an anti-ship ballistic missile. Brent crude costs over 78.5 USD a barrel this morning, and WTI is at 72.8 USD.
Łukasz Zembik, Oanda TMS Brokers
