EUR/USD: Decoupling between two monetary trajectories

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The resumption of contact of the flagship currency pair with its 20-day moving average (in dark blue) was immediately followed by a resumption of the bearish bias, the underlying bias, the one which has dominated the debates since the end of the month of September 2024.

In terms of statistics on Monday, inflation in the Euro Zone, as a first estimate for the month of December, was stable at +2.7% at an annual rate, excluding food, energy, alcohol and tobacco.

“The weak economy is increasingly giving some central bankers a tough time. Moreover, leading indicators show that companies are finding it increasingly difficult to impose price increases due to weak demand therefore we believe that in 2025, the inflation rate will stabilize around the 2 percent target set by the central bank. We continue to expect the deposit rate to fall by 25 basis points. January”, commented Ulrike Kastens, European economist at DWS.

Across the Atlantic, the ISM services stood at 54.1 points, an even more pronounced increase than the consensus would suggest. “The price component of the ISM Services, which rebounds to its highest level since February 2023 (64.4 vs 58.2 the previous month), is not good news for the Federal Reserve and its president Jerome Powell who had already warned , in December, that a continued slowdown in inflation towards the target was the necessary condition for further rate cuts Knowing that underlying PCE inflation, in annual data, has not. not made any further progress towards the objective for two quarters…” commented Alexandre Baradez (IG France).

“The rebound in the number of available jobs (JOLTS figure) will also push the Fed to be patient because it removes possible fears linked to the job market, the Fed’s other mandate.”

Anything that “pushes the Fed to be patient” will be likely to anticipate a 50, or even only 25 basis points, decline in Fed Funds over the whole of 2025, and therefore increase the Dollar’s potential for remuneration vis-à-vis of the Euro. Forex traders will have valuable reference points on the issue at 8:00 p.m. with the publication of the traditional Minutes, a chronological report of the debates of the last FOMC.

As a reminder, this meeting of the Fed Monetary Policy Committee ended unsurprisingly on 12/19 with a 25 basis point reduction in the remuneration of the Fed Funds.

But the powerful central bank also published an update of its economic projections, highlighting the great strength of the labor market. The Fed suggests that it could only lower rates by 50 basis points cumulatively over the whole of next year.

The Fed has therefore adopted a rather offensive tone, particularly due to the still chronic tensions on the job market. Like every quarter, it published a document eagerly awaited by the markets: the famous dot plots. This dot plot shows that Fed members’ median expectation for 2025 incorporates only 50 basis points (0.5 percentage points) of policy rate cuts. However, in previous dot plots, in September, members anticipated a rate cut of 100 basis points over 2025.

It is therefore a decoupling that will take place between policies and therefore monetary trajectories on both sides of the Atlantic. “While two weeks ago, without saying a word, the ECB had undertaken a “dovish” turn during its last monetary policy meeting of the year by indicating that restrictive key rates were no longer necessary, members of the Fed seem, for their part, to follow a completely different path For those who were waiting for a Christmas gift from Jerome Powell, we will therefore have to go back…” summarized Thomas Giudici, head of bond management at Auris Gestion. .

To follow at 2:30 p.m. weekly registrations for unemployment benefits and the results of the ADP survey on private employment.

At midday on the foreign exchange market, the Euro was trading against $1.0315 approximately.

KEY GRAPHIC ELEMENTS

The reaction movement carried out at the end of last week, encouraged on Monday by press information denied by D Trump, is already running out of steam.

This surge is not likely to counter the underlying bearish bias, but sends a legitimate message of protest. The 50-day moving average (in orange) continues to constitute a solid technical and graphical barrier.

MEDIUM TERM FORECAST

Considering the key graphical factors that we have mentioned, our opinion is negative in the medium term on the EURUSD parity.

Our entry point is at $1.0315. The price target for our bearish scenario is $1.0001. To preserve the invested capital, we advise you to position a protective stop at $1.0461.

The expected profitability of this Forex strategy is 314 pips and the risk of loss is 146 pips.

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