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FX Week Ahead: December ECB Rate Decision & EUR/USD Rate Forecast

FX Week Ahead: December ECB Rate Decision & EUR/USD Rate Forecast

Christopher Vecchio, CFA, Senior Strategist
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European Central Bank Meeting Overview:

  • The December European Central Bank rate decision will conclude on Thursday, December 10 at 12:45 GMT. No change in the main interest rate is anticipated, although other enhancements to stimulus are possible.
  • The recent scandal around ECB Governing Council member Phillip Lane may make life more difficult for doves, in turn, limiting how much the ECB can do to tamp down the Euro.
  • Retail trader positioning suggests a bearish bias to EUR/USD rates.

12/10 THURSDAY | 12:45 GMT | EUR European Central Bank Rate Decision (DEC)

The December European Central Bank rate decision will conclude on Thursday, December 10 at 12:45 GMT. According to a Bloomberg news survey, no change in the main interest rate is anticipated, although other enhancements to stimulus are possible. But it’s also possible that the recent scandal around ECB Governing Council member Phillip Lane may make life more difficult for doves, in turn, limiting how much the ECB can do to tamp down the Euro.

EUROPEAN CENTRAL BANK INTEREST RATE EXPECTATIONS (December 7, 2020) (TABLE 1)

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Accordingly, expectations for the ECB to keep its policy on hold at the December meeting, at least vis-à-vis the interest rate channel, have been stable over the past month. According to Eurozone overnight index swaps, there is a 78% chance of no change in interest rate policy, slightly lower than the 82% chance of no change in policy discounted back in mid-November.

The uptick in front end rate cut expectations (improving from 18% to 22% over the past month) is in-line with rate cut expectations gathering pace in mid-2021: June 2021 is now favored for the next interest rate move, up from July 2021.

But if the ECB does eventually act to cap Euro gains, then it seems less and less likely that the efforts will come vis-à-vis the interest rate channel. On Wednesday, November 11, ECB President Christine Lagarde said that “while all options are on the table, the pandemic emergency purchase program and targeted longer-term refinancing operations have proven their effectiveness. They are therefore likely to remain the main tools for adjusting our monetary policy.” More QE might be on its way, but rate cuts seem unlikely – this year or next.

Pair to Watch: EUR/USD

EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (December 2019 to December 2020) (CHART 1)

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EUR/USD rates are working on a doji candle (if not a hammer) following their bullish breakout above sideways range resistance in place since late-June. Overall, the outlook remains bullish following several weeks of EUR/USD rates maintaining their elevation above the downtrend from the 2008 and 2014 highs (from the all-time high).

EUR/USD rates are holding their daily 5-, 8-, 13-, and 21-EMA envelope, which is in bullish sequential order. Daily MACD is trending higher above its signal line, while Slow Stochastics are steadying in overbought territory. Momentum remains in bulls’ favor as the prospect for a longer-term bottom come into focus. It still holds that final targets for a simple doubling of the broader range dating back to late-June would suggest gains through 1.2600 in the coming months.

Read more: Euro Rally Pauses as Brexit Lingers - Outlook Remains Bullish for EUR/USD, EUR/JPY Rates

IG Client Sentiment Index: EUR/USD Rate Forecast (December 7, 2020) (Chart 2)

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EUR/USD: Retail trader data shows 27.95% of traders are net-long with the ratio of traders short to long at 2.58 to 1. The number of traders net-long is 8.93% higher than yesterday and 18.30% higher from last week, while the number of traders net-short is 8.36% higher than yesterday and 6.27% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/USD price trend may soon reverse lower despite the fact traders remain net-short.

Read more: FX Week Ahead: December BOC Rate Decision and USD/CAD Rate Forecast

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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