Note: This is the last Fx weekly for this year. We’ll resume with our regular weekly updates every Monday from January 10. In the meantime, stay tuned for our yearly 2022 Fx analysis that we will publish in the first week of the new year (January 3-7, 2022).

EURUSD Technical Analysis:

EURUSD continues to trade in its consolidation range that is thus far capped around the 1.1380 high to the upside, and the 1.12 zone to the downside. Based on the channel that defined the downtrend since June and the RSI’s reading close to 30, the consolidation can continue for a few more weeks. 

This means that EURUSD can potentially make another upside attempt toward the top side of the range at 1.1380 and above. In this regard, the key resistance to hold the downtrend intact is the 1.15 zone, around the channel’s falling trendline. But it’s important to keep in mind that this trendline is moving down, so it currently stands near 1.1450 but will converge further lower toward 1.14 over the coming weeks.

Support seems firmly pinned around the 1.12 zone. A break below the November low here would suggest that the road toward the 1.10 area is clearing.

US Dollar Fundamental Outlook: Fed Delivers on Hawkish Expectations; PCE Inflation in Focus This Week

The Fed largely delivered on the hawkish market expectations for the meeting last Wednesday. They doubled the pace of tapering to 30B per month, meaning that QE will end completely in March 2022. Many view this as the Fed opening the door to an earlier rate hike, potentially even in March.

They also significantly upgraded their inflation forecasts, now expecting it to finish this year at 5.3% and next year at 2.6%. All this was hawkish, yet the dollar ended the day lower and fell further the following day. Indeed, almost everything the Fed did was fully priced into the Fx market. Profit-taking and position squaring ahead of the holidays were likely a factor behind the post-Fed USD correction.

However, the case for further modest USD strength largely remains intact. Perhaps that was most evident on Friday when the dollar returned toward its weekly high. After the initial Fed reaction was digested, traders were back to buying dollars as it remains the “cleanest dirty shirt” among major Fx currencies. Investors know in the back of their minds that the Fed is the most hawkish major central bank currently, and few would want to stand in the way of this USD uptrend.

The focus this week is on the PCE inflation report, due on Thursday. A hotter number than the consensus forecasts (or the Fed’s 5.3%) can easily inspire fresh USD buying and potentially take it to new local highs. Keep in mind, however, the illiquid holiday period will start toward the end of this week (Christmas is on Saturday) and will last into the new year. This could mean that any reaction to the PCE inflation data may be muted as the market prepares to settle in a holiday range.

Other than the PCE inflation report, the calendar is very light this week and next but will get busier in the first week of January. Following the New Year break, the main focus for Fx traders will be on Nonfarm Payrolls that Friday (January 7). The ISM manufacturing and services PMIs will also be released that week.

Euro Fundamental Outlook: ECB Stays Dovish, Reiterates no Rate Hikes in 2022

The EUR got a lift post the ECB meeting, which was likely also an extension of the corrective USD reaction to the Fed meeting from the day before. Aside from the sheer volatility of a very busy week, other potential reasons that caused the euro’s bullish reaction are the slight hawkish adjustments the ECB made, such as the sizable upward revision of their inflation projections. Most forecasters didn’t expect such a sharp increase, especially for 2022 which was upgraded to 3.2% vs the previous forecast of 1.7% made in September.

Still, the overall takeaway from the ECB meeting was neutral and more dovish than hawkish in any case. The ECB firmly remains one of the most dovish central banks on a relative basis. While everyone else is tapering QE and preparing to hike rates, the ECB just told us last week that they will keep doing QE purchases at least until the end of 2022 and possibly beyond. The ECB also reiterated that rate hikes are highly unlikely to come next year. All of this is pure dovishness that will hardly inspire any flows into the EUR currency for the time being.

The EUR calendar is also very quiet over the final two weeks of 2021 and gets somewhat busier on the first week of the new year, with the key focus on flash CPI inflation (January 7). In the meantime, the already established trends and ranges are likely to dominate EUR price action, or the market may simply spend the entire holiday period in compressed horizontal consolidation.