Investors ceased selling off the US dollar in June when the Fed abandoned its patient policy. The ECB continues maintaining its ultra-easy monetary policy. Will anything change in December? Let us discuss the Forex outlook and make up a EURUSD trading plan.
Weekly euro fundamental forecast
The ECB has adopted the idea of the temporary nature of high consumer prices from the Fed and continues to hatch it, although the US central bankers more often speak about long-term factors pushing the prices up. The ECB members widely agreed on the expected hump-shaped pattern in the shorter-term inflation outlook. They insist on the need to have two options to deal with both a prolonged period of elevated inflation levels and its rapid fall below the 2% target. The European regulator doesn’t worry about the rise in the euro-area CPI to a 13-high or the Bundesbank forecast, suggesting Germany’s consumer price rate could reach 6%.
Patience, patience, and patience again. This is how the ECB imagines its future monetary policy, judging by the Governing Council November meeting minutes. The Fed featured the same stance during most of the first half of 2021, encouraging investors to sell the US dollar. In June-November, the euro is being sold off instead of the greenback.
The European Central Bank acknowledges the upside risks to inflation but suggests a need for the governing council to avoid an overreaction. The ECB needs to keep sufficient optionality in calibrating its future asset purchases to address all inflation scenarios that might unfold, both upside and downside.
The Governing Council meeting will be the highlight of the week ending December 3. Investors expect the central bank to decide to stop its emergency asset purchases in March and to step up its longer-standing asset purchase programme, the APP. The central bank needs optionality while markets bet on higher inflation forecasts for 2021-2023.
Dynamics of asset purchases under European QE
The ECB is increasingly diverging from other major central banks, such as the Fed, which have responded to the recent surge in inflation by promising to tighten policy, pointing out its weakness. This is evidenced by the 7.5% fall in EURUSD since the FOMC June meeting, at which the Fed first hinted about its readiness to take active steps. Since then, the chances of the Fed’s aggressive monetary restriction have only grown. Goldman Sachs predicts that the federal funds rate will rise in June, September, and December (previously expected in July and November). In January, the Fed is expected to taper the QE by $30 billion per month. In 2023, the bank expects two rate hikes, which implies an increase in the rate to 1.5%. By that time, the ECB will only take the first step, if it does at all.
Weekly EURUSD trading plan
In addition to the ECB policy of patience, there is a new variant of COVID-19 originated in South Africa, resulting in turmoil in financial markets, the fourth wave of the pandemic and energy crisis in Europe. Furthermore, the Brexit issue is again hot. Therefore, the positions of the EURUSD bulls naturally look weak. Nonetheless, the expectations of the ECB hawkish surprises at the meeting on December 2 could force sellers t exit shorts. Thus, one could still consider buying the euro in the short term if the price breaks out the resistance zone of $1.1225-1.123. However, one should be extremely cautious and use stop losses.
Price chart of EURUSD in real time mode
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