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#1 16-12-2020 13:25:06

johnedward
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EUR/USD: the rally continues ahead of today's FED meeting

EUR/USD: the rally continues ahead of today's FED meeting


The EUR/USD pair rebounded today above 1.22, as a mixture of optimism about the U.S. fiscal stimulus, the upcoming vaccine, and hopes for a Brexit agreement are boosting the euro and weighing on the dollar.

On the EUR side: There is always a glimmer of hope in the discussions on Brexit. The consensus is that an agreement should be reached, perhaps even at the last minute. If this is not the case and the United Kingdom leaves without an agreement this year, then an agreement is likely to be reached next year, so nothing is lost. A Brexit without an agreement would inevitably have a negative impact on the eurozone. Germany will apply new restrictive measures as of today, followed by the Czech Republic and the Netherlands who will introduce similar measures. France has already ended of its harsh lockdown and the Italians may also face restrictions around Christmas. Spain in turn is experiencing a rise of positive cases.

On the USD side: The dollar remains at weak levels as the DXY index is trading at a new low just above the 90 mark, a level last seen in April 2018, which according to MUFG Bank analysts underscores high expectations that the Fed will send a message of political monetary easing for a long time to come. We now suspect that the FOMC is delaying the change in the composition of the EQ. However, the policy statement may well include an option to change the composition and may suggest that the FOMC monitor the weighted average maturity (WAM) and suggest that the WAM could be changed if the FOMC believes that financial market conditions are not conducive to achieving its inflation target. The guidance is also likely to be much more explicit about maintaining the current rate of WAM until labour market conditions are "on track to achieve maximum employment and inflation is on track to average 2 percent over time". The biggest concern going into this meeting will be the lack of political support to offset the downside risks in the short term. There is still no agreed fiscal stimulus package and if one of the Republican candidates wins the second round of Georgia's elections on 5 January (considered very likely), then the fiscal stimulus package may not materialize.

In this context, it would appear that all of these factors point to a continuation of the upward movement of the pair.

KEY CHART ELEMENTS

The short term trend remains bullish, and a further upward trend is underway with a current high of 1.2210 towards 1.2230.

FORECAST

We keep a bullish opinion above 1.2175 in the direction of 1.2229.

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