EUR/USD: Tension created by US consumption

Lacking US benchmarks, both in terms of stock market data and economic data releases due to the Thanksgiving holiday, the Euro is retreating, testing a downward trendline (drawn in black below the chart). While currency traders seem to agree on the scenario of another 25 basis point cut in the Fed Funds rate on December 10th, they remain uncertain about the future trajectory of the Dollar's return.

"Investors are now trying to discern which trend is prevailing within the Federal Reserve. What is certain is that it finds itself in a delicate situation, with its officials publicly disagreeing on whether to prioritise controlling inflation or stimulating employment. Until now, some central bank leaders had been sending a chilly message, mentioning the 'necessary caution' and a possible maintenance of interest rates, dragging markets down. However, more recent pronouncements indicate the opposite, this time triggering a bullish effect on Wall Street," says Greg Kounowski, Investment Advisor at Norman K.

This fear of a schism within the Fed is clouding the view of the interest rate trajectory to 2026. This is especially true since markets are only just beginning to reconnect with valuable macroeconomic benchmarks, which they were deprived of during the longest government shutdown in history.

"With a record-breaking shutdown, the October jobs report and CPI will not be released in full. However, we should keep a close eye on the latest data to be released before the Fed meeting on 9-10 December: weekly jobless claims (4 December), the PCE index, which is closely watched by the Fed for its long-term inflation target, and the University of Michigan consumer sentiment index (5 December)," adds the asset management executive.

The CME Group's FedWatch tool now puts the probability of a 25 basis point drop in the dollar's value on 10 December, following the last FOMC meeting of the year, at nearly 80%.

Xavier Chapard, Strategist at LBPAM, now believes "the Fed will cut rates by 25 basis points on 10 December, although we continue to think it will cut rates less than the markets anticipate next year. The fact that no Fed member attempted to dissuade markets from anticipating a rate cut before the start of the silence period this weekend, as well as the publication of the Beige Book, have finally convinced us."

"The Fed's report, based on a collection of anecdotes, indicates that US economic activity was relatively unchanged in November, as in the October Beige Book. But the tone of the report is even more cautious. In particular, consumer spending reportedly declined slightly according to the November report, which is consistent with the sharp slowdown in retail sales in September and the deterioration in consumer confidence in October and November. This is not surprising given that the November Beige Book was compiled during the government shutdown, which is expected to temporarily weigh on consumption in Q4."

The sluggish retail sales and the latest consumer confidence index of 88.8 are putting pressure on the foreign exchange market, as consumption remains structurally the primary driver of wealth creation in the US.

Right now, the EUR/USD is trading at $1.1560.

KEY TECHNICAL ELEMENTS
The upward trendline that had prevailed until now (in black on the chart) has been broken, with a confirmation pullback. A bearish outlook is proposed below this trendline, as the Relative Strength Index (RSI) collapses. The 20-day moving average (in dark blue) has just broken significantly below its 50-day counterpart (in orange). The gap between these two technical indicators is widening, while the RSI has been in a marked downward trend since mid-September. A downward trendline has been restraining prices since September 18th.

MEDIUM-TERM FORECAST
Based on the key technical factors mentioned above, our medium-term outlook for the EUR/USD is bearish.

Our entry point is $1.1559. The price target for our bearish scenario is $1.1013. To protect your invested capital, we advise you to place a stop-loss order at $1.1666.

The expected profit for this forex strategy is 546 pips, and the potential loss is 107 pips.