EUR/USD: Below $1.0550, selling pressure remains in the majority

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The Euro/Dollar remained anchored in a fundamental bearish bias, before the latest monetary policy decision, Wednesday, December 18, from the Fed following the FOMC. What “gift” will they find under Powell’s tree? In all, the barometer that constitutes the stock markets shows serenity and confidence.

“We expect the FOMC to cut rates by 25 basis points next week, but will indicate a more gradual rate path subsequently”, argue the economists at Barclays.

“We believe the Economic Outlook report will show upward revisions to growth and inflation, lower unemployment, and three cuts next year. We maintain our baseline assumption that the FOMC will not cut its rates more than twice in 2025,” they add.

The CME Group’s FedWatch tool puts the probability of seeing the Fed validating this 25 basis point easing of the dollar’s rent at an overwhelming 97.1%.

Currency traders are digesting a decision of the same nature – but which does not meet exactly the same objectives – from the ECB which was completing a Governing Council, the last of the year.

The scenario of a drop of 50 basis points, which without holding the rope was part of the universe of possibilities, was therefore ruled out. This probability had in any case clearly “fallen due in particular to moderate statements by members of the ECB, including Isabel Schnabel, indicating that the measures taken by the central bank do not resolve the structural problems. “I would warn against an evolution too large, i.e. towards accommodating territory. I don’t think this is appropriate in the current perspective” she declared a few days ago in an interview with our colleagues at Bloomberg”, noted Alexandre Baradez (IG France).

However, Christine Lagarde did not avoid “the risk of increased frictions in world trade”, which could “weigh on the growth of the euro zone by reducing exports and weakening the world economy”. The ECB has also revised downwards its growth and inflation forecasts from 2024 to 2026.

“As expected, she did not make a commitment on a future direction of monetary policy and did not suggest that a further rate cut was planned for January. Given the high degree of political uncertainty and economic, the ECB maintains its dependence on data and its case-by-case approach for each meeting”, acts Ulrike Kastens, European economist DWS, who [continue] to think that the ECB is on a trajectory of rate cuts.

“Although growth forecasts have been revised downward, risks to the economy are not yet fully reflected in GDP projections. This is expected to be gradually corrected in 2025. We expect another rate cut in January and others will follow. We anticipate that the ECB will reduce the deposit rate to 2% in 2025.

“More importantly, in our view, the statement and press conference made it very clear that the monetary stance was still restrictive, with Christine Lagarde (the president of the ECB, editor’s note) stating that there was ‘no question on this subject'”, underlines Frederik Ducrozet director of Macroeconomic Research at Pictet Wealth Management.

“In addition, the wording on inflation and wages was also dovish. High domestic inflation remains a concern, but it was described as the adjustment of ‘certain sectors’ to the inflationary surge passed ‘with substantial delay'”, he continues.

In the immediate future, currency traders have just become aware, very early in the month, of the first estimates from the PMI barometers in the Euro Zone. The German industrial component, which came out below expectations at 42.5, weighs down the synthetic data for the entire monetary union. However, “if the manufacturing industry remains stuck in a sharp recession, the rebound recorded in the services sector is good news for the economy as a whole”, notes Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, who adds:

“Germany and France, the two main economies in the region, are currently in very uncertain political situations. This climate prevents the implementation, in the short term, of reforms necessary to revive growth and contributes to the persistent weakness of the two countries In the longer term, however, this strong uncertainty implies the possibility of an improvement in the situation: if the future governments of the two countries manage to draw up a road map, the year 2025 could hold some challenges. good surprises. In fact, the confidence of private sector companies in the euro zone regarding growth in their activity in the next twelve months has increased slightly compared to November.

To follow the barometer indicator of industrial health in the United States, Empire State index, expected to fall sharply to 6.4.

At midday on the foreign exchange market, the Euro was trading against $1.0490 approximately.

KEY GRAPHIC ELEMENTS

The wedge formed since November 22 is coming to an end, and the energy contained is now compressed. An exit from the bottom, consistent with the entry from the top in the second part of November in a volatile environment, is anticipated.

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 1.0487 USD. The price target for our bearish scenario is at 1.0101 USD. To preserve the invested capital, we advise you to position a protective stop at 1.0636 USD.

The expected profitability of this Forex strategy is 386 pips and the risk of loss is 149 pips.

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