EUR/USD: The Final Note

The upcoming week is packed with significant fundamental events—essentially the "final note" of the year. The Federal Reserve, the Bank of England, and the Bank of Japan will hold their final meetings of the year. Major macroeconomic reports will be released in Europe and the United States. Following this, the pre-Christmas, New Year, and post-New Year periods, typically marked by low liquidity and an informational lull, will commence. Traders will largely trade on momentum unless major political events disrupt the markets.

In other words, the upcoming week is significant for EUR/USD (and all other dollar pairs).

Monday is PMI day, with preliminary December readings for key European countries. According to forecasts, business activity indices in France, Germany, and the Eurozone's manufacturing and services sectors will remain in contraction territory (below the 50-point threshold) but may show minimal positive dynamics. If the reports are in the "red zone," they will exert additional pressure on the euro.

The manufacturing PMI for the U.S. will be published during the U.S. session. It is expected to remain in contraction territory, declining from 49.7 to 49.4. If the index surpasses the 50.0 threshold, the dollar could receive support.

Key speakers for Monday include European Central Bank President Christine Lagarde and Executive Board Member Isabel Schnabel, who may comment on the outcomes of the December ECB meeting. Following the December meeting, the Bank clarified that it would continue to ease monetary policy (at a moderate pace) despite accelerating inflation in the eurozone. If their remarks merely reiterate the main points of the post-meeting press conference, the market may disregard their rhetoric.

Germany's IFO indices will be released during Tuesday's European session, and negative dynamics are expected. The business climate index is projected to fall to 85.5 (from 85.7) and the current assessment index to 84.0 (the lowest since June 2020).

On the same day, Germany will publish ZEW indices, which are also expected to show weak performance. The economic sentiment index is forecasted to decline to 6.4 points (from 6.7), and the current conditions index to 11.8 (from 12.5).

At the December ECB meeting, the central bank emphasized that the Eurozone's economic recovery is slower than expected. The ECB downgraded its 2024 GDP growth forecast and revealed that a 50-basis-point rate cut had been considered. If the PMI, IFO, and ZEW indices are weaker than expected, markets may again discuss the likelihood of a 50-basis-point cut in early 2025.

Wednesday is the week's most important day for EUR/USD traders. The Fed will announce the results of its final meeting of the year. According to CME FedWatch, the probability of a 25-basis-point rate cut is 96%, meaning the market is almost certain that the Fed will implement this scenario. However, the outlook for future policy is unclear. For example, there's currently a 75% probability of a pause in January if the Fed cuts rates by 25 basis points in December. It's too early to predict the outcome of the March meeting.

The Fed's December meeting is guaranteed to trigger significant volatility in EUR/USD, considering the preceding comments from FOMC members and inflation reports. Last week, U.S. CPI and PPI reports for November revealed accelerating headline inflation and stagnant core inflation. These reports were published during the Fed's "blackout period," so no official comments were made. How aggressively the Fed will address the November inflation data remains an open question.

The Fed might react to November's inflation acceleration by signaling a slower pace of monetary easing in 2025 (a mild scenario supporting the dollar), announcing a pause in rate cuts (a more impactful scenario for the dollar), or even hinting at a potential rate hike next year (an ultra-hawkish scenario). Although the latter is unlikely, it cannot be ruled out entirely—San Francisco Fed President Mary Daly recently mentioned the possibility of raising rates if inflation accelerates consistently. If the Fed takes a similarly hawkish tone at the December meeting, it could trigger a dollar rally, including in EUR/USD.

The final Q3 GDP data for the U.S. will be published on Thursday. The second estimate confirmed the initial reading, showing GDP growth of 2.8% (down from 3.0% in Q2). Most experts expect the final estimate to align with earlier figures. The report will only impact EUR/USD if the final result deviates from 2.8%.

Additionally, the weekly initial jobless claims report will be released. Last week, claims unexpectedly spiked to 242,000—the highest level since early October. The upcoming report is expected to show a further increase to 245,000, which could pressure the dollar.

The Philadelphia Fed's manufacturing index for December will also be released. It is expected to rise to 2.5 points from November's -5.5.

Finally, Thursday will feature a report on U.S. existing home sales. Following a 3.4% increase in October, sales are expected to rise by another 1.0% in November. For dollar bulls, the indicator must avoid negative territory.

On Friday, the U.S. will publish the core PCE index, a key inflation metric closely watched by the Fed. The index accelerated to 2.8% year-over-year in October after two months of stagnation (2.7% in August and September). For November, it is expected to rise further to 2.9%. The dollar will receive significant support if the index meets or exceeds expectations. Notably, other inflation metrics (CPI, PPI, wages) also showed upward trends in November, reflecting accelerating inflation in the U.S. The core PCE index will complete the puzzle.

Technical Outlook

On the daily chart, EUR/USD trades between the middle and lower Bollinger Bands and below all Ichimoku indicator lines. Last week, traders failed to break through the 1.0530 resistance level (the middle Bollinger Band). The initial downside target is 1.0470 (the lower Bollinger Band on the four-hour chart), with the main target slightly lower at 1.0430 (the lower Bollinger Band on the daily chart).