Markets are pinning a lot of hopes on the December Federal Reserve meeting, including shock expectations. The central bank can and should start raising rates on Wednesday, if this does not happen, investors will begin to prepare for an increase in March 2022 by 0.50%, according to Bank of America. The labor market will be overheated by then.
The classic scenario is an increase in the rate in the first half of the year by 0.25%. It is followed by the majority of market participants.
A rate increase this week is likely to shake Wall Street. It is noted that the stock market rally observed last week gives investors the opportunity to sell shares ahead of the Fed's verdict. The bank recommends "selling on growth", and not "buying on the fall", it is also noted that the decline in shares of technology companies strongly resembles the bursting of the dot-com bubble in 2000.
The European Central Bank meeting will also be in focus this week. Since the American and European central banks now have different views on accelerating inflation, the euro will have to touch new annual lows. It has no other way. ING believes that one of the problems that the ECB will face at the last meeting this year will be the exit from the emergency asset purchase program in connection with the pandemic. ECB President Christine Lagarde has repeatedly made it clear that the stimulus program will not be curtailed ahead of schedule, despite accelerating inflation. Markets will have to wait until the end of March. In addition, it will not be possible to exit the program without causing serious disruptions in the work of the bond market, especially securities of peripheral countries in a difficult situation.
One thing is obvious now, it will be difficult for the ECB to soften the end of PEPP on Thursday. It is possible that in return, the central bank will want to increase the APP program or even transfer the burden of decisions to February. Of course, this is a negative for the euro.
The euro is vulnerable, while the dollar feels like a king. The greenback's growth scenario to the detriment of the European counterpart is now being followed by everyone who is not lazy. The fall of the EUR/USD pair is most obvious and tactically correct. Citi is also against the euro this week.
"We see moderate hawkish risks at the December FOMC meeting, as the Fed is still looking for a way to respond to increased inflation," analysts comment.
However, not everyone believes in the unconditional and strong growth of the dollar, since the quotes have already taken into account all possible sources of strength in the short term. The tightening of the Fed's policy has long been laid down and re-mortgaged in the price, which means there can be any reaction: that is, the quote will go up or down or even stay in place.
At the same time, the most stubborn pessimists on EUR/USD are waiting for the price to fall to 1,1000 and below. If this happens, it will only be for a couple of weeks. This is unlikely to affect the overall picture.
Another thing is when a trader trading with leverage bought euros, for example, at 1.1300, hoping for the beginning of growth. Falling into three figures is a big loss, no one will sit it out. It is impossible to do without stops below the level of 1.1200.
It is impossible to exclude the fact that the time of the cheap euro has come to an end, in other words, it has reached the bottom. Major players can start buying a single currency against the results of the central bank meetings. All this is fine, but it is catastrophically difficult to say for sure now. There is one important point that is still worth focusing on the most: while EUR/USD is below the 1.1400 mark– there are more chances to update the lows.
There are a number of other factors that can limit the decline of the euro. We are talking about the rollback of the yield of treasuries together with the interest of the markets to risk that appeared on the eve. However, this design is so unstable that investors are unlikely to decide to use it. It would be preferable to wait for the outcome of the meetings – the FOMC decision on Wednesday and the ECB verdict on Thursday.
The EUR/USD pair remained under moderate pressure on Monday, it was not possible to develop Friday's growth momentum for obvious reasons.
The technical picture for EUR/USD continues to favor the bears, and attempts at growth can be regarded as an opportunity for short positions. The euro will slip below the 1.1200 mark without unnecessary words and dust.
Dollar Index
As the first reaction of the dollar to the reversal of monetary policy, a strong jump up against its main competitors is expected. Further, some correction is possible. The benchmark for the dollar index is 98.00 points.