Euro's Ascension and USD Dynamics: Insights from the ECB and US GDP

The EURUSD exhibited an upward trajectory, nearing 1.0880 during the European session on Friday. This surge was attributed to the relatively optimistic remarks from ECB members. Gediminas Simkus, an ECB policymaker, exuded confidence, asserting that March wouldn't witness a rate cut based on available data. Simkus indicated a higher likelihood of rate cuts later in the year, signaling a tempered outlook within the ECB, diverging from current market expectations.Another ECB member, Martins Kazaks, expressed confidence in monetary policy but advocated patience. Kazaks emphasized the eventual reduction of interest rates, highlighting the ECB's cautious approach and deeming premature rate cuts more detrimental than a measured delay.Following Thursday's ECB interest rate decision, where rates remained unchanged for the third consecutive meeting, the European currency faced challenges. The Main Refinancing Operations Rate is held at 4.50%, and the Deposit Facility Rate is at 4.0%. Post-meeting, EURUSD's reaction was mixed, with prices maintaining a narrow range (1.0885-1.09).However, stronger-than-expected GDP data from the United States released 15 minutes later has offered strong support for the USD, reinforcing the downward pressure on the EURUSD:The QoQ GDP growth rate in the US in 4Q was 3.3%, confidently beating the consensus estimate of 2%. The magnitude of surprise indicates that the market and the Fed could potentially underestimate the strength and persistence of the underlying growth drivers of the US economy (or even overlook a structural shift that favors a higher growth rate in general). This basically lays the groundwork for market speculation that the Fed will sound hawkish in February, won’t cut in March, and probably delay the first dovish policy action to the May meeting. These speculations should benefit USD since surprises in the major US macroeconomic data justify expectations that the respective momentum in the data flow will linger for some time (including 1Q of 2024).Market participants eagerly awaited the release of the PCE Price Index for further insights into US economic conditions. The Core PCE Price Index, a favored inflation indicator by the Fed, was closely scrutinized. Despite unlikely surprises in PCE inflation figures, attention shifted to underlying details such as Personal Spending and Personal Income readings for December.Projections indicated a 0.4% monthly increase in Personal Spending following November's 0.2% uptick, while Personal Income was forecast to rise by 0.3%. Disappointing figures in these releases could be perceived as a signal of weakening consumption, negatively impacting the US Dollar in the immediate aftermath. Conversely, positive results were poised to bolster the USD in the short term.