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Strong batch of US data, ECB gives little away

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By Craig Erlam  

US economic data continues to point to an economy that’s doing very well, despite the various headwinds, including very high interest rates.

GDP data for the fourth quarter easily exceeded expectations, rising 3.3% on an annualised basis, adding to the increasing view that the US could be heading for a fairytale scenario, not just a soft landing.

We’ve spoken a lot about resilience in the US economy over the last couple of years, but that the economy can continue to show such strength and low unemployment with interest rates so high and inflation falling back toward target, is unbelievable.

ECB keeps cards close to chest

The European Central Bank left interest rates on hold at 4% on Thursday and claimed inflation is progressing towards its target, while giving no clear guidance on when interest rates will start falling.

We came into the new year with markets pricing in a March rate cut and that is now looking increasingly difficult.

Even with a late pivot – which was always the likely strategy of the central bank – policymakers would have to signal that a rate cut is a live possibility over the next six weeks in appearances made between meetings.

That’s not impossible, but it’s arguably not particularly transparent. The data is unlikely to surprise to that degree.

President Christine Lagarde and some colleagues have previously indicated a rate cut in summer may be appropriate, but investors are not convinced we’ll have to wait that long.

Lagarde stuck with that on Thursday while suggesting demand was weaker, as is the economy, and inflation is falling.

Perhaps this is her way of leaving the door slightly ajar for March or maybe the usual lack of clear guidance has left everyone desperately looking for something that isn’t there.

Lagarde and her colleagues probably wanted to give absolutely nothing away, instead opting for an array of vague, uninformative statements that buy them six more weeks before they may have to say or do something.

EURUSD rangebound

The euro has drifted lower after the ECB press conference and US data, but it hasn’t broken out of the range it’s traded in over the last week or so.

The correction we’ve seen since the turn of the year appears to be running on fumes, but there’s still a question of whether this is just that, and will turn higher and look to break the highs, or just a continuation of the longer-term sideways trend.

There are some important support levels between 1.07 and 1.0850 which could tell us which is the case.

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.