EUR/USD Weekly Forecast: Federal Reserve’s decision could rock financial boards

• The European Central Bank trimmed interest rates as expected in November.
• The Federal Reserve will decide on monetary policy next Wednesday
• EUR/USD bearish case prevailed throughout the week despite limited directional momentum.

The EUR/USD pair finished the week in the red amid a resurgent US Dollar (USD) in a risk-averse environment but remained within a well-limited range. Cautious benefited the Greenback for most of these last few days, while profit-taking ahead of the close provided near-term support to the Euro. The pair settled below the 1.0500 level as investors gear up for the final central banks’ round of the year.

European Central Bank more dovish yet unimpressive

The European Central Bank (ECB) announced on Thursday that policymakers decided to trim the main three interest rates by 25 basis points (bps) each, as expected. Accordingly, the interest rates on the deposit facility, the main refinancing operations and the marginal lending facility were decreased to 3.00%, 3.15% and 3.40%, respectively.

The accompanying statement showed that policymakers believe the disinflation process is “well on track,” forecasting inflation will hover around 2% in the upcoming three years, settling around the Governing Council’s 2% medium-term target on a sustained basis.

Regarding growth, officials downgraded September projections. Staff see the economy growing by 0.7% in 2024, 1.1% in 2025, 1.4% in 2026 and 1.3% in 2027. Also, some policymakers mentioned a  potential 50 bps cut, but the idea found no support.

Finally, President Christine Lagarde offered a press conference in which she continued with a less hawkish language, spurring speculation the ECB’s monetary policy is getting closer to neutral. Among other things, Lagarde said that inflation risks are now two-sided while repeating decisions will remain data-dependant and be taken meeting by meeting.

The EUR/USD pair seesawed between gains and losses with the announcement, but the ECB failed to trigger a relevant directional movement.

United States inflation ticked higher

Across the pond, the focus was on inflation. The United States (US) reported multiple inflation-related figures that showed an uptick in price pressures. On the one hand, the November Consumer Price Index (CPI) rose by 2.7% on a yearly basis from 2.6% in October,  On a monthly basis, the CPI rose 0.3% following the 0.2% increase recorded in October. Finally, the annual core CPI rose 3.3% from a year earlier. All figures matched investors' forecasts. With these figures, inflation accelerated for a second straight month and posted the steepest gain in the last seven months.

Additionally, the Producer Price Index (PPI) for the same month rose 3% on a yearly basis, higher than the 2.6% increase anticipated and the October 2.6% outcome. The annual core PPI rose 3.4% in the same period, surpassing analysts' estimate of 3.2%.

The uptick in price pressures was not enough to affect bets on an upcoming Federal Reserve (Fed) interest rate cut, despite progress towards the 2% goal has virtually stalled. Wall Street kept betting the Fed would deliver a 25 bps trim when it meets next week, with investors hoping Chairman Jerome Powell would deliver some clues on what 2025 may bring. Slowing rate cuts are on the table, given the upcoming Republican presidency and data showing inflation ticking higher in the last couple of months.

The macroeconomic calendar heats up

Data-wise, the calendar had little to offer. Germany confirmed that the Harmonized Index of Consumer Prices (HICP) rose 2.4% year-on-year (YoY) in November, as previously estimated. The upcoming days, on the contrary, will bring more light on the EU and US economic health.

S&P Global and the Hamburg Commercial Bank (HCOB) will release the preliminary estimates of the December Purchasing Managers Indexes (PMIs) for the EU and the US on Monday. On Tuesday, the US will release November Retail Sales, while on Wednesday will bring an EU inflation update. The US will publish the final estimate of the Q3 Gross Domestic Product (GDP) on Thursday, while finally, on Friday, the country will release the November Personal Consumption Expenditures (PCE) Price Index, the Fed’s favorite inflation gauge.

As previously noted, the Fed will make its appearance mid-week, announcing its decision on monetary policy, which should not surprise on rates but could do so on the future central bank’s path.

As a side note and beyond the Fed, the Bank of Japan (BoJ) and the Bank of England (BoE) will also announce their decisions on monetary policy and introduce noise on financial boards.

EUR/USD technical outlook  

From a technical perspective, the EUR/USD pair is poised to extend its recent slide. In the weekly chart, the pair is developing below all its moving averages. The 20 Simple Moving Average (SMA) turned south, albeit it still develops above a directionless 100 SMA. The 200 SMA, in the meantime, grinds lower above the shorter ones. Technical indicators, in the meantime, resumed their slides within negative levels after correcting oversold conditions, reflecting sellers retain the driver’s seat.

The daily chart for the EUR/USD pair shows a mildly bearish 20 SMA provided dynamic resistance since last Wednesday, currently standing at around 1.0525. At the same time, the 100 and 200 SMAs gain bearish strength over 300 pips above the current level, having less relevance in the technical picture for the upcoming days, yet anyway reflecting bears are in control. Finally, the same chart shows that the Momentum indicator is directionless around its 100 level, failing to provide directional clues, while the Relative Strength Index (RSI) indicator hovers around 41, also lacking directional strength.

The pair has immediate support in the 1.0440 region, where it bottomed in October, followed by the 1.0320-1.0330 price zone. Resistance comes at the aforementioned 1.0530 area, followed by the 1.0600 threshold. A clear break above the latter should open the door for an extension towards the 1.0700 price zone.