Euro (EUR/USD) Outlook Muted Ahead Of ECB And Fed Policy Decisions

Financial markets are already starting to slow down and with little in the way of economic data or events today the likelihood of any sizeable moves in the fx space is limited at best. There are a couple of notable US releases at the end of this week – US PPI and Michigan Consumer Confidence on Friday – but until then the calendar is bare and traders will have little to work with. Next week however is very different with a slew of central bank monetary policy decisions announced, including the Federal Reserve (FOMC) on Wednesday, December 14, and the European Central Bank (ECB) the following day. Both central banks are expected to hike their borrowing rates by 50 basis points, but as always it is the rhetoric surrounding these decisions that will guide markets going into the New Year.

In an interview with Milano Finanza, published today, ECB chief economist Philip Lane suggested that Euro Area inflation may be peaking and that price pressures may drop sharply later in 2023.

‘It’s probably too early to make that judgment, but I would be reasonably confident in saying that it is likely we are close to peak inflation. But whether this already is the peak or whether it will arrive at the start of 2023, is still uncertain. The main uncertainty is that we’ve seen so much volatility in gas prices. In some countries, consumer prices have moved a lot, while in others for example some utility companies have not yet finished hiking prices. Given the significant increase in prices, I don’t rule out some extra inflation early next year. Once we are past the initial months of 2023, later on in 2023 – in the spring or summer – we should see a sizeable drop in the inflation rate. That said, the journey of inflation from the current very high levels back to 2% will take time.’

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The US dollar picked up yesterday after the release of the November US ISM data. The report showed a strong uptick in business activity, leading to thoughts that the Fed may hike rates further than previously thought to combat runaway inflation.

The daily EUR/USD chart retains a positive outlook despite yesterday’s US dollar strength and subsequent EUR/USD sell-off. The pair trade on either side of 1.0500, after touching a six-month high yesterday of 1.0595, and the 200-day moving average remains supportive. The 20-dma is breaking through the longer-dated moving average, highlighting the short-term strength in the pair. Support starts around 1.0360/70 with initial resistance just under 1.0600.

EUR/USD Daily Price Chart

(Click on image to enlarge)


Charts via TradingView

Retail trader data show 45.55% of traders are net-long with the ratio of traders short to long at 1.20 to 1. The number of traders net-long is 19.66% higher than yesterday and 3.67% lower than last week, while the number of traders net-short is 11.63% lower than yesterday and 1.11% higher than last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/USD trading bias.

What is your view on the EURO – bullish or bearish?

More By This Author:

Gold Price Outlook - Looking To Build The Next Leg Higher?
British Pound Outlook – GBP/USD Driven Higher by the US Dollar, Where Next?
USD/JPY Slumps Further Ahead Of A Key US Jobs Report

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