EUR/USD: pre-Xmas hints at growth, jobs and inflation

In a climate of risk appetite which has barely begun in this final stretch of the year, the EUR stabilised against the dollar, at the top of a vast range, under a resistance zone at $1.1012, as tomorrow's publication of PCE (personal consumption expenditures) prices approaches, the Fed's preferred measure in its assessment of inflation. Until then, currency traders will be able to gauge tensions in employment with weekly registrations for unemployment benefits today at 14:30 (CET), and the final GDP data for the third quarter, expected at +5.1% at an annualised rate.

"In 2024, the decline in inflation will continue at a less sustained pace than in 2023" predict the strategists at Swiss Life AM. "The fall in the prices of used cars will contribute in particular to disinflation. Concerning the prices of services, the expected normalization will only succeed if the economy slows down, the labor shortage is resolved and the associated wage pressure is ebbing. The still high rise in housing costs represents the greatest inflationary risk for 2024."

Yesterday, currency traders were surprised by the stronger than expected rise in the household confidence index across the Atlantic (Conference Board consumer index), which stood at 110.8, up almost 10 points.

Basically, currency traders continued to digest the messages sent by the Fed and the ECB last week. Messages which showed significant changes in the communication of these two major central banks.

"The Fed made a significant change in communication by indicating that the possibility of rate cuts had been discussed. This appears premature given the resilience of growth, a robust job market and the inflation still high", judge the OSTRUM AM strategists.

"The ECB remained cautious due to the strong increase in unit labor costs. It is waiting for data from the first half of 2024 to judge the evolution of salaries," they continue before concluding that "a divergence major change has thus taken place between the Fed and the ECB. Despite the ECB's efforts to contain market expectations, the latter have retained the significant change in communication from the Fed and anticipate rate cuts that are still too aggressive."

Right now, the EUR/USD is trading at $1.0984.

KEY CHART ELEMENTS
The complete retracement carried out over the whole week gives even more substance to the broad range evolution scenario, between $1.0693 and $1.1012. The latter was validated by the clarity of the inflection made on Friday 15/12. This resistance level ($1.1012) is significantly reinforced.

MEDIUM TERM FORECAST
Considering the key graphical factors that we have mentioned, our opinion is negative in the medium term on the EUR/USD.

Our entry point is at $1.0963. The price target for our bearish scenario is at $1.0694. To preserve the invested capital, we advise you to position a protective stop at $1.1071.

The expected profitability of this forex strategy is 269 pips and the risk of loss is 108 pips.