One of the major themes this year was (still is) the strength of the Euro against the U.S. dollar. After it reached 1.20 in the summer, the European Central Bank (ECB) intervened, expressing its worry about the higher EURUSD exchange rate.

As time passed, the exchange rate did correct. It fell from 1.20 to 1.16, but only to find more buyers. It traded yesterday 1.2003, the highest since summer.

Over the weekend, Nordea, one of the largest European investment houses, called for the EURUSD to trade well above 1.20 by year’s end. It considers both the Fed and the upcoming “operation twist” to be announced in December. In other words, more dovish the U.S. dollar than hawkish the Euro.

What Can the ECB Do?

One thing is sure – as long as the EURUSD exchange rate remains close to 1.20, it will keep trying to break above. For the ECB, the difference is not that important if, say, the EURUSD trades 1.21 or 1.19. Some fluctuation is always considered.

What matters is what the EURUSD exchange rate signals for the rest of the Euro pairs. Rarely the other Euro pairs part of the FX dashboard diverge from the main EURUSD move.

The ECB has the advantage of the first mover. More precisely, it delivers its monetary policy decision six days before the Fed does it in December. As such, it still has some room to maneuver and set the stage for a weaker Euro toward the year’s end.

To do so, it must surprise the market. It already announced that it would increase Quantitative Easing (QE). Also, it pre-committed to improve the TLTRO conditions and even the amount of loans it is willing to give. But that might not be enough.

Just like in the Fed’s case, if it is already priced in, the package will not mean much for the EURUSD. Therefore, the ECB may consider delivering much more than the market expects. This way, it will gain some time and allow the crisis to pass before allowing for a stronger Euro, in accordance with the current account surplus in the Euro area.

All in all, December is set up to be a short but intense trading month. Those expecting calm markets until Christmas are likely to be disappointed as the end of year flows will also influence the price action.