EUR/USD: forecast for December 7-13
By Elizabeth Belugina
The meeting of the European Central Bank clearly disappointed the market. After Mario Draghi’s comments in October and November the market was clearly pricing in a big expansion of monetary easing and was positioned bearishly on the single currency. The ECB, however, delivered too little. There was a squeeze in EUR shorts and the currency soared.
In short, the ECB cut deposit rate only by the minimal number expected of 10 bps, didn’t increase the monthly amount of bond purchases and extended QE by only 6 months. There clearly are disagreements within the ECB’s Governing Council. Draghi failed to persuade Bundesbank Jens Weidmann and some other policymakers to adopt more aggressive monetary easing. It’s also interesting that Draghi didn’t reply on the question whether the ECB will make further cuts to the deposit rates. This is positive for the euro in the near term.
Still, euro’s reaction to the upside was very violent and exceptional. Formally, the divergence in policy between the euro area and the United States is still present. Good US employment data solidified the prospects of the Federal Reserve’s rate hike on December 16. However, the market is now more and more leaning to the expectations that the Fed’s rate increases will be small and gradual.
Next week there will much less intense in terms of news from the euro area. There won’t be important economic data to either confirm or deny the fact that the state of the euro zone’s economy is getting better. The most important thing to watch will be what Weidmann says on Thursday. European finance ministers will meet on Monday and Tuesday. Traders and will keep trying to guess what the Fed will do on December 16 and, even more importantly, how the US central bank will act after that. The most important releases in the US will take place on Friday (retail sales, PPI).
EUR/USD faces resistance in the 1.1000/1.1050 area (daily MAs). A break higher will open the way to 1.1300.
Our main scenario is that next week the bears will try to at least partly erase the gains made on the ECB meeting. The ECB president Mario Draghi will speak late on Friday, December 4, and may once again move the market.