EUR/USD: EU political risks and ECB aggressive pricing drive the market – OCBC

Euro (EUR) traded little changed, was last seen at 1.0532 levels. This week, EUR may continue to see more volatility because of the political risks in Germany and the upcoming ECB meeting on Thursday, OCBC’s FX analysts Frances Cheung and Christopher Wong note.

Classic inverted head & shoulders pattern on charts

“Daily momentum is mild bullish but rise in RSI slowed. Price pattern shows a classic formation of an inverted head & shoulders pattern, which is typically associated with a bullish reversal. Neckline comes in at 1.0610/20 levels. Break-out puts 1.0670 (38.2% fibo) within reach before next resistance comes in at 1.0750/75 levels (50 DMA, 50% fibo). Support at 1.0460 levels.”

“On Wednesday, German Chancellor Scholz is expected to call for a vote of confidence and the Bundestag will vote next Monday on 16 Dec. To survive the vote, Scholz would need to receive the support of an absolute majority of 367 votes. But in the event, he fails, then Germany is likely to make way for elections on 23 Feb 2025. Far right AfD is calling for Germany to leave the European Union, the EUR and Paris climate deal as the party prepares for early elections in Feb-2025. The concern here is the explicit language to quit EU unlike its manifesto ahead of the European parliament elections previously in Jun-2024.”

“On Thursday, ECB meeting takes centre stage. Markets have already reduced bets for 50bp cut and is now pricing just a 25bp cut. OIS-implied has also priced in back-to-back cuts for 1H next year, taking rates to below 2% in Jun 2025, or even 1.75% in July. This may have been overdone. While political risks in Europe may still weigh on EUR, but we had also flagged that many EUR negatives, such as slowing growth momentum, political fallout, aggressive ECB cut expectations, etc. are already in the price. We still do not rule out the risk of EUR short squeeze in the short term.”