Weekly Preview: Walking on thin ice

Ahead is the most boring and simultaneously the most unpredictable week of the month. In general, the pre-New Year period is characterized by two opposite states: either a flat or abnormal volatility. Traders will either go into "winter hibernation" or show intense activity towards the end of the year. The thin market lives by its own rules, sometimes ignoring classical fundamental factors. However, the economic calendar for the upcoming week is practically empty, so traders are likely to trade more "on momentum." Let's consider the main events of the final week of December.

On December 25, almost all major trading platforms are closed due to the Christmas holiday. Therefore, the currency market is likely to fall into a "lethargic sleep" on this day. The only exception may be the USD/JPY pair, as during the Asian session, Bank of Japan Governor Kazuo Ueda is expected to speak.

Last week, the Japanese central bank disappointed USD/JPY sellers: traders expected at least a hint of an upcoming adjustment to monetary policy, but instead, Ueda stated at the final press conference that if necessary, he would take additional easing measures without hesitation. At the same time, he added that "we are still not foreseeing sustainable, stable inflation with enough confidence". The head of the BOJ hinted that the central bank intends to wait for the results of the annual negotiations between representatives of trade unions and business next spring before making serious decisions about future policy.

Following the December meeting, the yen significantly depreciated - the USD/JPY pair jumped towards the 145th figure. But by the end of last week, the bears recouped losses, mainly due to the dollar's weakness. The yen can also appreciate if Ueda states that the QQE issue is relevant and not off the agenda. The intrigue remains, as literally on Friday, the inflation report in Japan was published, according to which the main CPI core indicator slowed to 3.8% year-on-year from 4% in the prior month (this is the weakest growth rate of the indicator since March).

Tuesday, December 26, will also start with news from Japan. We can expect reports on the unemployment rate (forecasted at 2.5%, the same as in October) and the services producer price index (which is expected to edge up to 2.4%). The main consumer price index, calculated by the BOJ, will also be announced (it excludes the dynamics of food and energy prices from calculations, as well as temporary deviations from real movements, including changes in taxes).

During the US session, the house price index will be released. This indicator has been declining for two consecutive months, and is also expected to fall to 0.5% in November. However, this is one of several US housing price indicators, and such data have little impact on the currency market as they lag significantly compared to other releases.

In addition, the S&P/Case-Shiller 20 City index will be published, measuring the dynamics of housing prices in the twenty largest cities in the United States. Usually, this indicator has limited influence on the market. However, according to experts, its calculation methodology is recognized as one of the best. According to forecasts, this indicator will rise to 5.0% (it has shown growth for the second consecutive month). This report may provide some support for the greenback if the latest value ends up in the "green zone."

During the Asian session, we can expect a report on newly started construction of houses in Japan (a secondary indicator that is unlikely to affect USD/JPY).

A little later, at the start of the European session in Switzerland, an interesting (but less important) indicator will be published – the investor expectations index (calculated by the ZEW institute in collaboration with economists from Credit Suisse). According to forecasts, it will remain in the negative range, demonstrating slight "growth" - up to -26 points.

On December 28, the most important report will be released at the start of the US session: the initial jobless claims indicator. Two weeks ago, the indicator sharply decreased to 203,000. Last week, it reached 205,000. According to forecasts, next week it will rise up to 211,000.

A report on pending home sales in the United States will be published. In annual terms, this indicator should be in the negative range again (-6%). If this indicator ends up in the "red," it can exert significant pressure on the greenback, as other indicators in this area (volume of issued building permits, volume of sales in the primary/secondary real estate markets) have also been worse than forecasted.

The most significant report (although of secondary importance) will be published in the United States – the Chicago PMI index, which reflects the level of business activity in the Federal Reserve Bank of Chicago area (i.e., the Seventh Federal Reserve District, which includes the northern parts of Illinois and Indiana, southern Wisconsin, the Lower Peninsula of Michigan, and the state of Iowa). After a sharp rise to 55 points in November (a yearly high), a slight decline to 50 points is expected.

As we can see, the economic calendar for the last trading week of 2023 is not saturated with important events. More precisely, there is none – there is hardly any incoming information. The loud events of December (Fed and European Central Bank meetings, the core PCE index, comments from representatives of the ECB) are still fresh in memory – these events set the trend for the greenback to fall, and this trend will be realized to some extent in the upcoming pre-New Year days.

In regards to the EUR/USD pair, in the current fundamental conditions, considering short positions is not advisable at all: the dollar is clearly not the market's favorite. However, you should only consider long positions after buyers consolidate above the resistance level of 1.1020 (the upper line of the Bollinger Bands indicator on the 4-hour chart). The nearest targets for the upward movement are 1.1060 (the upper line of the Bollinger Bands indicator on the daily chart) and 1.1100.