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Euro Downtrend Against Dollar Projected to Extend this Week but Fed Meet is Key Risk

euro to dollar exchange rate 1

  • 1 EUR = 1.0581 USD, +0.18%, today's high = 1.0582, today's low = 1.0524

We expect the Euro to Dollar conversion to continue trending lower but acknowledge the US Federal Reserve policy meeting mid-week as a potential disruptor.

EUR/USD is in a concerted short-term downtrend which looks likely to continue lower.

Our studies suggest a break below the 1.0503 December 5 lows would confirm an extension down to the next target at the 1.0460 March lows.

The recent break lower on the news that the ECB is extending its programme of money printing until the end of the 2017 caused a spike down in the exchange rate, which looks like the start of the next leg of the downtrend:

EURUSDDec10

Commerzbank’s techncical strategist, Karen Jones, also sees a likelihood of more downside on the horizon after the rejection at 1.0875, which was a key turning point:

“EUR/USD briefly spiked up to 1.0875, this looks exhaustive price action and a slide back below the 20-day ma at 1.0665 has been seen, this should be enough to focus attention on 1.050 and 1.0467, the recent low and the March low.

“This remains a major break down point to parity.”

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The Federal Reserve is key Fundamental Risk

This week's interest rate decision at the US Federal Reserve on Wednesday is the most significant event on the calendar for the Euro to Dollar exchange rate in the coming week.

The Federal Reserve Open Market Committee delivers their decision on Wednesday, December 13 at 19.00 (GMT).

The Fed are almost 100% certain of raising interest rates at their meeting on Wednesday, so if they do it is unlikely to produce much movement in the Dollar, given it is what everyone has been expecting.

However, for EUR/USD, the devil will be in the detail – have individual member’s expectations for future interest rate rises changed? 

This is important as most currency analysts are in agreement that what now matters for the US Dollar is the movement on interest rates in 2017 and 2018.

These expectations are expressed by the dots placed on the Dot Plot Graph:

Dot plots

Each shaded circle indicates the value (rounded to the nearest 1/8 percentage point) of each member’s judgment of the midpoint of the appropriate target range for the federal funds rate or the appropriate target level for the federal funds rate at the end of the specified calendar year or over the longer run..

The consensus is that there will be no change to dot plot which currently shows two hikes expected in 2017, and three in 2018.

However, if there is a change for either for more or less hikes it will impact on the Dollar.

Further, will there by any change in the language of the statement, is Janet Yellen more optimistic about growth and jobs?

Yellen's tone will be important and will add to the general mix that foreign exchange traders must try and decipher about just how many interest rates the Fed is likely to deliver over the coming two years.

There is a possibility of the word “roughly” being removed in the phrase “risks are roughly balanced” to produce a more unambiguous and positive statement, according to Strategist Athanasios Vamvakidis at Bank of America Merrill Lynch.

Janet Yellen’s press conference will also be the focus of much attention as investors seek confirmation for the current positive ‘reflationary’ outlook.

She is expected to be “cautiously optimistic” by Vamvakidis.

Data for the Euro

It is a thin week for the Euro with the main data release CPI on Friday, December 16, which expected to show a rise of 0.6% yoy in November.

Then on Thursday, December 15 we get the release of Manufacturing and Services PMI for December, which are both expected to come out at 53.8.

US Data to Watch 

Before the Fed meeting on the same day is Retail Sales at 13.30 which is expected to show a 0.3% rise in November and Core Retail Sales, which is estimated to show a 0.4% increase.

"Data has already shown a fall in auto sales in November due to tightening credit standards so this may weigh on November Retail Sales figures," says BBVA’s Amanda Augustine in London.

Nevertheless, she still expects November Retail Sales to be strong due to Consumer Confidence hitting a 12-year high in the month which should keep the Euro bid.

Factory Gate Prices (PPP), released at the same time, are expected to show a 0.1% rise for the month of November.

On Thursday, December 14, Core CPI is estimated to rise 0.2% in November, whilst the Philadelphia Fed Manufacturing Index is expected to show a 9.0 result for December.

“We are likely to get a lower headline gain in November but a stronger Core result,” says Augustine.

The week rounds up with Building Permits at 13.30 on Friday, December 15, which are forecast to decline slightly to 1.24m in November.

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