EUR/USD: price forecast ahead of this week's FED and BCE meetings

The US dollar has rallied this year and EUR/USD is one of the pairs reflecting the rally. In December, the EUR/USD has just consolidated near yearly lows, as we await the Fed and ECB decisions expected next week.

EUR/USD is hovering near yearly lows with only a few weeks left in the trading year. The pair has recently traded in a narrow range near the lows as investors and traders await the most important trading week of December.

Next week, the Fed and ECB will deliver their monetary policy decisions. First comes the Fed on Wednesday.

Fed Chairman Jerome Powell recently surprised the markets with his hawkish comments. He suggested that it was time for the Fed to drop the word "transitory" when talking about inflation, implying that the Fed is considering action to combat rising prices for goods and services.

It is therefore possible that the Fed will adopt a hawkish tone next week, in which case the US dollar should rally further. However, any market move should be taken with caution, given that the end of the year is approaching and liquidity is thin.

One day after the Fed, the ECB is due to deliver its message. The focus will be on guidance on the end of the Emergency Pandemic Purchase Programme (EPPP) and the future of conventional quantitative easing executed through the Conventional Asset Programme (CAP).

Nevertheless, the risk next week is tilted in favour of the dollar for the simple reason that the market now expects two Fed rate hikes in 2022 and no ECB rate hikes next year. Therefore, the fundamental picture still favours a higher dollar.

And the technical picture?

EUR/USD looks oversold here

The recent drop from the 1.16 area happened so quickly that it took the bulls by surprise. However, the technical picture has indicated bearish conditions all year, as suggested by the double top at 1.23 and a head and shoulders pattern.

However, the EUR/USD pair appears stretched at current levels. Therefore, a new low for the year should not be ruled out, but expect buyers to emerge on such a move. However, unless EUR/USD manages to climb back above 1.16, any rally will be met with further selling.