EUR/USD: A 75 BP jump in ECB rates (Nomura's ambitious scenario)

This is a crucial week for traders who will have to deal with the Fed's FOMC meeting tomorrow and Thursday and the outcome of the Fed's Board of Governors on Thursday.

For the Federal Reserve, it is this essential question of the shape of the Fed Funds curve that will focus the attention of the markets for this last part of the year: flatter, the progression could be slower, but what about the "terminal" rate?

For Erick Muller, Director of Product and Investment Strategy at Muzinich & Co, "the projections of the FOMC members (the DOTS) will send a clear message on the intentions to keep rates high for a long time, not to validate market expectations of a "pivot" which may seem premature for the Fed. This should result in a median projection rising towards 5% for 2023 but also projections much more concentrated between 4% and 5% for 2024 than last September, when 2024 projections were widely dispersed."

"The last [Fed Funds] hike of the year could slow to 50 bps, after four consecutive 75 bps hikes," for IVO Partners strategists. "Despite this, economic indicators in the US, such as PMI indices and unemployment figures, point to a slowdown in the economy and confirm investors' expectations of a recession in 2023. There is still uncertainty about the size and duration of this recession, although the consensus seems to be for a "moderate" recession."

Regarding the ECB, which will necessarily be influenced by a Powell effect anyway, the question of how high the market should go is not clear (50 or 75 bps?). "Fundamentally, the inflation outlook has not improved since the October meeting, supporting the need for a further 75bp hike to ensure that inflation expectations are firmly anchored and start to drive down core inflation" for Nomura strategists. Therefore, the Japanese bank is sticking to this "bold" expectation while acknowledging the likelihood of a 50 bp rate hike.

In terms of Friday's stats, the producer price index rose by 0.3% in November, against a target of 0.2%, and excluding food and energy from the basket, the index climbed by 0.4% against a consensus of 0.2%. The consumer confidence index (preliminary data, U-Mich) rose sharply to 59, well above the consensus. No major figures were on the agenda yesterday, and we will have to wait until later today to have something to get our teeth into, with the German ZEW and the consumer price indices in the US.

At midday on the foreign exchange market, the Euro was trading at around $1.0550.

KEY CHART ELEMENTS
Volatility remains high on the spot market, which is tracing a broad consolidation, the structure of which remains to be defined, around $1.0300. A continuation of these nervous oscillations is the preferred option, a scenario that is not very attractive for taking positions. We prefer to stay out of the spot for the time being. The limits of the flag are clearly identified, between $1.0240 and $1.05. The formation, in the long term, of a diamond pattern is not excluded.

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

Our entry point is $1.0556. The price target of our bearish scenario is $1.0101. In order to preserve the capital invested, we advise you to set a protective stop at $1.0661.

The expected return on this forex strategy is 455 pips and the risk of loss is 105 pips.