FX.co ★ EUR/USD: Buckle up, it's the hottest week of December

The upcoming week marks the "final chord" of the outgoing year. Despite there being 14 days until the New Year, during this period, the market will be trading almost on autopilot, amid an almost empty economic calendar. However, the next five days are saturated (you could even say oversaturated) with crucial events and releases. The Bank of England, the European Central Bank, the Federal Reserve, and the Swiss National Bank will hold their meetings. In addition to that, there are significant economic reports (data on US inflation, PMIs, ZEW, GDP data for the UK and New Zealand, key labor market data for Australia – and this is far from an exhaustive list).

In the context of the EUR/USD pair, we are primarily interested in US inflation, the Fed meeting, and the ECB meeting (here the chronology is observed). Optionally, PMI data, ZEW, and industrial production volume in the US are of interest.

Inflation + Fed

It is interesting that we will learn the November value of US inflation (CPI) literally a day before the announcement of the results of the Fed's December meeting. Considering the preceding events, this report can have a significant impact on the Fed's stance.

Recall that last month, all inflation indicators entered the "red zone," reflecting a slowdown in inflation growth in October. If indicators repeat the "October trajectory" this week, dovish sentiments in the market, which already exert background pressure on the greenback, will intensify.

On Tuesday, December 12, the Consumer Price Index for November will be published in the United States. According to preliminary forecasts, the CPI in monthly terms will remain at zero (as in October), and on a yearly basis, it will decrease to 3.1% (after three months of growth, the indicator will show a decline). The core index, excluding food and energy prices, is expected to accelerate slightly on a monthly basis (0.3% after 0.2% the month before) and remain at the October level on a yearly basis (4.0%).

The Next day, December 13th, the Fed will announce the results of its last meeting this year. On one hand, the formal results of this meeting are predetermined: according to the CME FedWatch Tool, the probability of maintaining the status quo is 97.1%. Therefore, investors will focus on the accompanying statement, the dot plot, and Fed Chair Jerome Powell's rhetoric. The main intrigue would be to what extent has the central bank's position softened in light of slowing inflation (especially if November CPI comes out in the red zone) and decent Non-Farm Payrolls? According to some experts (including ANZ analysts), the Fed will lower the dot plot but maintain a hawkish stance, assuring the markets that the question of a rate cut is not on the agenda.

Incidentally, 50 out of 102 economists surveyed by Reuters express confidence that the Fed will cut rates "before July." The rest expect the Fed to maintain a wait-and-see position at least until mid-summer. 72 respondents believe that the Fed will cut rates by 75-100 basis points over the next year. Almost all surveyed economists (except for five) stated that the interest rate hiking cycle is already "definitely over."

Weaker inflation and soft formulations from the Fed, along with an updated downward dot plot, will strengthen the dovish sentiment in the market, mounting pressure on the dollar. However, an alternative scenario is not ruled out. Unexpected acceleration in core inflation will likely drown out the narrative of easing monetary policy in the first half of 2024.

ECB

On Thursday, December 14th, the ECB will announce its decision. Traders will focus on the rhetoric of the head of the central bank, as the formal results are practically predetermined: there's a 99.9% chance that the central bank will maintain all parameters of monetary policy. Although hawkish sentiments were prevalent in the market in the fall, based on statements by central bank representatives. Several members of the Governing Council said that it was still too early to put an end to the current tightening cycle. However, these discussions ended after the release of the eurozone inflation data in November. All components of the report turned out to be in the red zone – for example, the CPI came in at 2.4% YoY (the lowest value since August 2021). The core index dropped to 3.6% YoY, the lowest since May 2022. The headline CPI has been consistently declining for the fourth consecutive month, and at a fairly active pace.

Naturally, under such conditions, talking about a rate hike in December is out of the question. But at the same time, in my opinion, after the December ECB meeting, the euro may receive significant support, even if the central bank decides to keep rates unchanged. The fact is that the aforementioned inflation data intensified dovish sentiment in the market regarding the ECB's future course of actions. Essentially, the market has solidified the opinion that the ECB may start cutting rates in the first or second quarter of 2024.

With a high probability, the ECB will deny such intentions, thereby providing support to the single currency. Certain signals of this nature have already been heard: for example, the head of the Central Bank of Slovakia, Peter Kazimir called expectations of a March rate cut "science fiction". All other ECB members who voiced their opinions after the release of November data talked about the improbability of further hikes, but none of them expressed readiness to discuss the timing of monetary easing. Therefore, the dovish expectations of the bears may turn against them if the ECB takes a "moderately hawkish" position.

Conclusions

In my opinion, the upcoming week will be full of surprises. Judging by the overall sentiment, traders expect a more hawkish stance from the Fed (in light of the recent Non-Farm Payrolls), while they anticipate the opposite from the ECB – a softer rhetoric (given the recent inflation data). Personally, I have significant doubts about the realization of such a smooth scenario. The November labor market report reflected a decline in unemployment in the United States, but it also showed a decrease in average wage growth on a yearly basis. Moreover, the stronger employment growth (which, by the way, still fell short of the 200,000 mark) was driven by the resolution of strikes in the manufacturing and film industries.

As for the ECB, the central bank may agree that the rate hike cycle is over. However, it may strongly refute rumors that the central bank will start monetary easing in the first or second quarter of next year. Such a plot twist could strengthen the euro, even despite the actual conclusion of the rate hike cycle.

Thus, interesting events with weakly predictable consequences lie ahead. One thing we can say is that the EUR/USD pair is about to enter a zone of price turbulence. Therefore, "fasten your seat belts," colleagues!