EUR/USD: a big week is here for traders

Forex traders will have long since noted this week on their calendars, a week that concentrates major monetary meetings, including an ECB Governing Council meeting on Thursday, and the outcome of the last FOMC meeting of the year for the Fed, which is expected to be a turning point after the confirmation of inflation that is no longer transitory, even according to its Chairman J. Powell. On Friday, traders were able to take note of consumer prices, whose monthly growth rate remains firm.

In the broadest base of products, prices increased more than expected in November (+0.8% monthly), against +0.9% in September. Adjusted for volatile items (food and energy), prices rose by 0.5%, in line with expectations, according to the latest data from the US Bureau of Labor Statistics. This is enough to give the Fed food for thought, without putting additional pressure.

The challenge this week will be to refine the monetary tightening schedule of the two major institutions on both sides of the Atlantic, in order to deduce as finely as possible the relative trajectory of the "remuneration" of the two leading currencies.

On the Fed, "the question of the number of rate hikes is at the heart of the debate. [Traders] are now looking at three rate hikes next year, while maintaining those anticipated for 2023. The possible change in the Fed's monetary policy path has triggered a sharp increase in market volatility," says Mabrouk Chetouane, Director of Research and Strategy at BFT Investment Managers. However, this number of expected hikes may have to change quickly.

"The ECB should wait patiently to reduce its asset purchases before starting discussions on rate hikes," says Vincent Boy (IG France).

Outside of these purely monetary considerations, traders will continue to watch for the impact on risky assets of the economic situation in China, particularly on the real estate front. Mr. Boy says: "The latest economic data from China showed a slowdown in the economic rebound, impacted by the health crisis, shortages, and risks related to the real estate sector. We will also be watching industrial production and retail sales on Wednesday."

No major appointments to follow for the rest of the day. Note the encouraging contraction of the Italian unemployment rate from 9.9% to 9.3% of the labor force.

At midday on the foreign exchange market, the euro was trading at $1.1274.

KEY CHART ELEMENTS

The shorting trend was strongly reinforced by the break of a technical zone at 1.1530, on marubozu on 10 November. This was a major event, which resulted in a massive release of selling energy. The short term is aligned with the bearish medium term on the EUR/USD, but the entry point is no longer optimal, as the likelihood of a contending bounce forming is increasing at this point. Traders will prefer to stay out of the spot for the time being while waiting for a suitable entry point. A break of the Nov. low would give a signal.

A break of the November lows would signal the end of a straitjacketed lateralisation, which may be triggered by monetary announcements this week, or at least by inflections in the language used by the big money makers.

MEDIUM-TERM FORECAST

Based on the key chart factors we have mentioned, our medium-term view on the pair is neutral.

We will maintain this neutral view as long as the EUR/USD is positioned between support at $1.1150 and resistance at $1.1360.