The euro has been through a pretty bearish this year, so far down more than 10.0% from Feb high. At the same time last year, euro traders were optimistic about the EA economy. Traders rushed to buy the euro at the beginning of the year, but the anxiety short lived. There are loads of factors for the underperformance on EURUSD.

Protestantism, Italy and France political concerns, Germany downturn and higher U.S interest rates are the negative surprises dampen the euro bullish sentiment.

Overnight the single currency trade higher towards 20MA but has fallen more than 10.0% from Feb high and more than 6.0% on YTD basis. Besides, the dollar index and the yields on 10yr Treasury dropped ahead of the Fed meeting and investors weighed the Fed’s tone and updated economic projections.

In macroeconomic perspective, after last week’s dovish ECB and poor EA PMI surveys, Monday’s EA CPI printed below market expectations.

The euro area annual inflation rate was 1.9% in November 2018, down from 2.2% in October. A year earlier, the rate was 1.5%, according to Eurostat. The euro area flash estimate for November 2018, was 2.0%.

“The latest data and survey results have been weaker than expected.” Draghi raised concern in last week’s ECB meeting. In macroeconomic projections, the outlook for GDP growth has been revised down in 2018 and 2019. “GDP increasing by 1.9% in 2018, 1.7% in 2019, 1.7% in 2020 and 1.5% in 2021.”.

Latest EZ PMI surveys suggest the latest flash PMI survey data indicate that growth of business activity in the euro area slowed to the weakest for over four years in December, according to the IHS Markit.


The week ahead: Data-packed week; the Fed meeting should dominate the headlines. Among euro crosses the Brexit chaos and Riksbank policy meeting should raise the volatility for EURGBP and EURSEK.

Fed preview: What next is the key driver?

Market participants are waiting for Fed’s tone and updated economic projections; besides the subject of a rate hike is already priced in. December rate hike would bring the target range of 2.25-2.50%. In case of a dovish hike, we could see a quick rally in G10 &EM currencies and commodities. However, the hawkish surprise could eventually push the dollar above 100.00 handles. Our primary focus remains on the median rates in 2019 and 2020.

Analysts forecast:

“We still think the Fed is on its way to get to 3.00% by hiking in both in March and June. The Fed may hike one more time in the second half of 2019 but this is less certain. When 3% is reached, further hikes will be more ‘stop and go’ depending on how the economy is doing” Danske Bank said in a note.

Bill Diviney, Senior Economist at ABN AMRO, said: “We expect a fall in the ‘dots’ to signal two further rate hikes in 2019 (down from three), but for 2020 to be unchanged at one rate hike”.

ING forecast “Like the Fed, we are currently predicting three rate rises next year, but there is a lot of uncertainty, particularly relating to trade and we see the risks increasingly being skewed towards just two hikes.”

Nordea expects “We now expect two instead of three hikes in 2019 on top of the likely hike in December.”

We foresee the committee continuing to forecast multiple rate hikes through 2019. We are continuing to forecast multiple rate hikes through 2019. We anticipate one per quarter tp 3.125% at Sep 2019, Westpac said.


FX:

As we noted yesterday in our daily FX, the euro manage to hold the pivotal 1.1260 and rallied to 1.1357.

The first level to watch is 1.1360 above here 1.1390/1.1400, and 1.1440 exists. Getting through here could strengthen the bulls to aim further at 1.1500 levels.

A symmetrical triangle formation is still evident on the daily chart and traced out a double bottom at 1.1260. Hence, we expect the price likely to consolidate between 1.1260-1.1360 ahead of Fed’s feed.

Weekly trading range moved down to 1.1200-1.1350 from 1.1260-1.1440. Turning to daily indicators, RSI and oscillator turned back to bearish mode. We expect the Fed to raise interest rates on Wednesday. If it does and not overly dovish, EURUSD should go lower and could even break the pivotal 1.1260.

Scenario 1: 1.1500 could be expected if Fed hints two hikes in 2019.

Scenario 2: 1.1200/1.1180 could be expected it Fed hints three hikes in 2019.

On top of the dot plots, we watch the yields on 10yr Treasury. So far in December, the yields capped at 3.00%. The current range is 3.00%-2.75%, in case of a hawkish tone we could expect the range to move higher 3.00-3.25%.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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