EURUSD Stays Support Despite a Moderately Dovish ECB Message, Traders Eye US GDP Data

The EUR/USD faced a short-term sell-off, which was later recouped following the European Central Bank's decision to maintain the Main Refinancing Operations Rate at 4.50% during its initial policy meeting in 2024. Despite market expectations aligning with the central bank's decision, investors are now turning their focus to potential guidance on future interest rate cuts. ECB President Christine Lagarde is anticipated to shed light on the timing of the first rate cut, possibly in late summer.EURUSD trades above the key support area; however, the medium-term trend remains bearish, with the key resistance area residing near 1.10:Amid these developments, S&P500 futures have shown nominal gains in the European session, signaling a risk-on sentiment. However, the looming release of crucial United States data introduces the possibility of steep volatility. The US Dollar Index hovers around 103.30, while 10-year US Treasury yields have dipped to approximately 4.14%.Investors are eagerly awaiting the US Q4 Gross Domestic Product data, which is expected to provide insights into the interest rate outlook. Preliminary projections suggest a slowdown in the US economy's growth rate to 2.0%, down from the robust 4.9% expansion seen in the previous quarter. While the third quarter's growth was primarily driven by inventory accumulation, there is a risk that this catalyst will not manifest in Q4, driving a potential decline in the expansion rate at the end of 2023. A weaker GDP figure could accelerate expectations for an interest rate cut by the Federal Reserve in the first half of 2024. Furthermore, market participants are keeping a close eye on the core Personal Consumption Expenditure price index data for December. A persistent core PCE inflation report may reinforce the Fed's bias toward a more restrictive interest rate stance. Additionally, the GDP Price Deflator reading, a measure of changes in the prices of US-produced goods and services, will be scrutinized. The GDP Price Deflator climbed from 1.7% in Q2 to 3.3% in Q3, indicating inflation's positive impact on growth. The US Dollar remains resilient ahead of the GDP release, on the back of growing expectations for a delay in the Federal Reserve's anticipated rate cut. Policymakers, including San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic, have expressed reservations about an imminent rate cut, forcing market participants to scale back the March cut odds further. The CME FedWatch Tool's probability of a 25 basis point rate cut in March has declined below 50%, reflecting a shift in market positioning from nearly 80% in late December. A stronger-than-expected GDP growth in Q4 could further bolster the case against a March rate cut, potentially supporting the USD. However, a GDP reading in line with the consensus of 2%, coupled with a GDP Price Deflator at or above 3%, could help the USD maintain its position, while a decrease toward 2% may have adverse effects on the currency. Investors will be closely monitoring these key indicators, poised for potential market-moving shifts in the coming days.