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This week has been very intense for currency traders, with a cluster of monetary policy meetings, in particular those of the ECB and the Fed. If a status quo on rates, very widely anticipated, has been confirmed, the difference in tone employed by J Powell (relatively flexible) and C Lagarde (more firm), all in a climate of appetite for risk, will have favored the single currency.
“The ECB acknowledged that inflation was falling rapidly, but warned of a temporary recovery in the short term. It also continues to closely monitor the growth in unit labor costs, which are seen as a risk for future inflation,” notes Sebastian Vismara, senior economist and strategist at BNY Mellon Investment Management.
Currency traders had to postpone their average expectations of the first rate cut by a few months.
“Overall, we have received clear signals that the ECB is about to pivot in 2024, but Ms. Lagarde has tried to dampen speculation about rapid rate cuts,” summarizes Martin WOLBURG, chief economist of GENERAL INVESTMENTS.
On the other side of the Atlantic, as a reminder on Wednesday, J Powell adopted a much more flexible tone, reassuring in particular about the state of tension in private employment. The dot plots, moreover, were a pleasant surprise. The central bank members’ median projection for 2024 policy rates stands at 4.6%, implying a total of 75 basis points (0.75%) of rate cuts next year (or three decreases of 25 basis points). According to Bloomberg, economists did not expect as much. These new projections of Fed Funds reductions in 2024 constitute “a significant ‘dovish’ surprise that suits the market” for Joshua Jamner, analyst at ClearBridge Investments, a subsidiary of Franklin Templeton.
“The balance sheets of the Fed and the ECB will have to be further reduced before the first rate cuts are decided and it will probably be necessary to endure several more months of economic slowdown for the central banks to be definitively reassured about the convergence of inflation with the objective”, for Alexandre Baradez, head of market analysis at IG France.
In terms of statistics yesterday, signs of chronic resilience of the American economy could be noted with November retail sales and weekly registrations for unemployment benefits, which beat market expectations. To follow the Philly Fed index at 2:30 p.m. and the monthly industry report (volume and capacity utilization rate) at 3:15 p.m.
In the immediate future, it is the PMI activity indicators, as a first estimate for the current month, which are focusing attention. If the score, on the scale of the Euro Zone as a whole, is close to expectations for industry (44.2) in the absence of a bad German surprise, the score for services is however below the consensus, at 48.1. The Composite index fell from 47.6 in November to 47.0 in December, highlighting a decline in private business activity in the region for a seventh consecutive month. Excluding the first months of health confinement in 2020, the euro zone recorded its strongest quarterly contraction since the fourth quarter of 2012.
At midday on the foreign exchange market, the Euro was trading against $1.0965 approximately.
KEY GRAPHIC ELEMENTS
The complete retracement carried out over the whole week gives even more substance to the broad range evolution scenario, between $1.0693 and $1.1012.
MEDIUM TERM FORECAST
Considering the key graphical factors that we have mentioned, our opinion is negative in the medium term on the Euro Dollar (EURUSD).
Our entry point is at 1.0964 USD. The price target for our bearish scenario is at 1.0693 USD. To preserve the invested capital, we advise you to position a protective stop at 1.1071 USD.
The expected profitability of this Forex strategy is 271 pips and the risk of loss is 107 pips.
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