EUR/USD: the dollar maintain's its advantage after a key week

In a very nervous foreign exchange market, the EUR/USD remained compressed within a wedge around $1.13, with the dollar emerging as the "winner" from the last major monetary policy meetings this year, for both the Fed and the ECB, and the euro remaining, as a barometer of risk appetite, under pressure from the spread of the variant Omicron. And this while in the Netherlands, a harsh lockdown has been decreed, and in Denmark, new and unfair restrictions, in the form of quotas in restaurants and shops, have been restored.

On the monetary front last week, it was the ECB's turn, after the Fed on Wednesday, to be grilled as it completed a meeting of its Governing Council. The monetary institution headed by Christine Lagarde indicated that it was keeping its key rates unchanged while announcing a gradual reduction in the pace of asset purchases: net debt purchases under its €1,850 billion Emergency Pandemic Purchasing Programme (EPPP) will be further reduced in the first quarter of next year and will expire as planned at the end of March.

As a reminder, the Fed has paved the way for monetary normalisation, marking out the path a little more clearly. It plans to end its bond-buying programme in March and to raise rates by three quarters of a point in three stages over the coming year. The aim is to combat inflation, which is no longer temporary. Combined with the new economic projections, this strategic commitment by the Fed was not considered more hawkish than expected. It must be said that this (not too tight) turn was anticipated.

Matt Bailly, Deputy Managing Director and bond manager at OCTO AM, reaffirms the prospect of "a widening of the spread between US and European rates": all the economic, financial and monetary factors militate in favour of a much higher rise in rates in the US than in the Eurozone, as had already happened during the 2010 decade. This divergence could continue the strengthening trend of the dollar.

Despite regaining a few pips on Monday, the single currency was hit on Friday after the publication of a bad German indicator. The IFO business climate index in the Eurozone's largest economy fell from 96.6 points in October to 94.7 points. "Companies were less satisfied with their current situation and expectations became more pessimistic. Supply bottlenecks and the fourth wave of the coronavirus are challenging German companies," the IFO publication said.

Right now, the pair is trading at $1.1298.

KEY CHART ELEMENTS
In the immediate term, the EUR/USD is still in a wedge-shaped consolidation pattern, which is part of a powerful bearish background dynamic. The configuration remains heavy, but we warn against the temptation of an early return to bearish positions, the "risk" of a false exit from the top, in the very short term, being present. We are still waiting for a much better entry point.

MEDIUM-TERM FORECAST
Given the key chart factors we have mentioned, our medium-term view on the EUR/USD 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.