- EUR / USD could see more choppy trading this week
- Beach related consolidation could be resolved
- As the Fed, the decisions of the ECB follow one another quickly
- Key points from the Fed, ECB QE decision and CPI forecasts
Image © European Central Bank.
The euro rate against the dollar changed little over the past week, but trade could be more choppy in the coming days, as policy decisions by the Federal Reserve (Fed) and European Central Bank (ECB) may possibly respond if the euro can continue to maintain a major support level. just below 1.13.
The single European currency has consolidated in a narrow range against the dollar since the liquidation of the global market in late November prompted what appeared to be a market-wide abandonment of betting against low-yielding currencies that had been borrowed and sold previously to fund higher yielding asset bets elsewhere.
This consolidation kept the Euro-dollar rate contained between 1.1227 and its high of 1.1354 last week, but with key monetary policy decisions by the Fed and the ECB that followed each other quickly over the next few years. days, it is possible that the price action this week could give a decisive result. a break in one direction or the other for the single currency.
“The euro has held in a range of 1.1250 to 1.1350 for most of the past two weeks as it consolidates its losses through November (which brought it into oversold territory) “said Juan Manuel Herrera, strategist at Scotiabank.
“The EUR’s failure to make a material run to the 1.14 mark indicates that its downtrend will resume in the coming days to a new test of 1.12 and the November 24 low of 1 , 1186. Intermediate support is 1.1228, ”Herrera also said in a research note on Friday.
Above: Euro-dollar rate at weekly intervals with major moving averages and Fibonacci retracements of the 2020 rally indicating likely support areas.
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The Euro-dollar rate has repeatedly probed below the support level offered by the 61.8% Fibonacci retracement of the 2020 recovery trend, but has rarely been able to close below the level on a daily basis and has yet to maintain a weekly close below.
However, there is a risk that Wednesday’s Fed decision will trigger a further downward foray if the bank’s latest economic forecast suggests it could start raising US interest rates by Q2 of next year and on three or more occasions.
“A rally in risky assets and greater stability in US interest rates have allowed the dollar to fall from its highs at the end of November. The short-term direction of the currency will likely be determined by the Fed, ”said Zach Pandl, co-head of global currency strategy at Goldman Sachs.
“If the dot plot at this week’s FOMC meeting shows a median of two increases for 2022, we could see recent weakness expand, while a baseline of three or more increases for 2022 would lead to likely a return to the appreciation of the USD (markets currently price 2.6 Fed rate hikes next year), ”Pandl also said.
The Fed is expected to significantly accelerate the reduction of its quantitative easing program this week so that it ends earlier than the June 2022 date envisaged and announced in November.
This would create a margin for its interest rate to be lifted earlier than the market expected and its updated dot chart on Wednesday of policymakers’ own forecasts which will provide a rough guide to how soon this is likely to happen. .
It is the main focus of the market after 10 voting members of the Federal Open Market Committee – which is a decisive majority – have indicated in recent weeks that they could support a move to end the $ 120 billion QE program. dollars a month earlier this week. Encounter.
Wednesday’s Fed decision is followed by the December update from the European Central Bank, which will have the final say on whether the Euro-dollar rate is doomed to drop below the support line at 1, 1292 or whether he is able to extend the end-November rally below 1.1200. The euro would face several layers of technical resistance on the charts should a rebound occur, and the catalyst for such an outcome would likely lie in the ECB’s new inflation forecast and the advance ruling – or lack thereof. decision – regarding the future of its quantitative easing programs.
“The ECB is likely to reassess its political framework, ending the PEPP but completing the APP. The risk is a delay in the status of the APP program, highlighting the emergence of the new variant, ”said Mark McCormick, global head of foreign exchange strategy at TD Securities.
“For the first time in a long time, the euro offers a nice rebate, trading around -1 standard deviation. The short position is a crucial driver, underlining the prospect of an instinctive rebound next week, especially as hedge funds are a major contributor to the short position. The problem for the euro is that asset managers remain long, even if they have reduced their exposure over six months, ”McCormick also warned last Friday.
Above: Euro-dollar rate at daily intervals with Fibonacci retracements of the late September extension to the downside indicating likely areas of technical resistance to any further rebounds.
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The ECB has already telegraphed to the market that its pandemic-inspired quantitative easing program of € 1.85 trillion is expected to end in March, when the monetary allocation allocated to it is likely to be nearly exhausted, although many market players expect compensation. complete the monthly bond purchases made as part of its initial quantitative easing program known as the Asset Purchase Facility, or APP, which will be announced this week.
However, there is now a danger that the ECB will decide to avoid this latest move in an effort to gain greater clarity on the extent of the risks posed to the euro area economy by the latest strain of the coronavirus, and also potentially in order to observe developments around inflation.
That would be an upside risk for the euro-dollar rate at the end of the week, and one that would rise further if the new ECB inflation forecast showed that euro area inflation rates were at the 2% symmetrical target in the middle of the forecast. horizon.
The latter would be a sign that the bar or barriers to a possible rise in ECB interest rates are starting to drop.