Summary:
- FOMC and ECB meetings could be market movers for the EURUSD
- The Fed is expected to increase rates, guidelines for 2018 will be crucial
- EURUSD could be in the “ABC” correction
December central bank meetings have often far reaching consequences for currencies and it might be no different in case of the EURUSD as the pair faces two tests this week: the FOMC meeting on Wednesday and the ECB meeting on Thursday. Here we provide an analysis on what to expect from central banks.
FOMC (decision on Wednesday 7pm BST)
The Fed meeting is by far the most important this month. Central banks in Europe made their moves earlier this autumn and while they could steer market expectations game changing moves are not expected. Meanwhile the Fed is not only expected to increase rates for the third time this year but present some kind of guidance for 2018 on top of it. This guidance will be crucial. The last Fed’s dot-chart saw a more less solid consensus for 3 more hikes in 2018 and investors want to know if this remains the case. The problem for the Fed is that it will not know if the Tax Plan is eventually voted later this month and how it is going to look like as some details still need to be ironed out in Congress. However, it could be assumed that Fed will be looking for supportive fiscal policy which would leave more room for rate increases. Do notice that this will be the last post-meeting conference from Janet Yellen but that shouldn’t materially affect the guidance.
Investors want to know if the Fed is still planning to increase rates 3 times in 2018. Source: federalreserve.gov
ECB (decision on Thursday 12:30pm BST)
The ECB decided to extend the QE program to at least end of September (2018) albeit at a reduced pace of 30bn euro per month. Therefore it may seat on its hands this time and enjoy economic recovery. President Draghi could make some remarks about particularly good business sentiment although he is aware that appreciation of the euro could complicate a return of inflation and core inflation (ex. food and energy) has been stubbornly low throughout 2017.
Economic recovery in Europe is strong but underlying inflation pressure is modest. Source: Macrobond, XTB Research
EURUSD technical analysis
EURUSD has been in a consolidation since late summer and the latest rally failed to retest ’18 highs from August. This November rally could be marked as a wave “B” in a larger “ABC” correction and a current move could be labeled as a wave “C”. A 38.2% retracement of the rally from the first half of 2017 can be found at 1.1425.
EURUSD could be riding the final wave “C” of the “ABC” correction. Source: xStation5