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Euro risks remain to the downside as Fed may do little for bulls

Dec 16 2018 10:34
Vassilis Karamanis, Bloomberg

Euro bulls may not be able to count on the Federal Reserve meeting next week for support as European policy makers grow more concerned over the region's growth prospects.

Data out of the euro area on Friday offered fresh ammunition to euro bears after European Central Bank President Mario Draghi noted the balance of risks is moving to the downside. The common currency may remain under pressure in the medium-term, heading toward important technical support at $1.1187.

The Federal Open Market Committee holds its final meeting of 2018 and policy makers are expected to increase interest rates by a quarter percentage point on December 19, the fourth time this year. They are seen dialling back the number of moves next year to two, in March and September, from the three hikes economists saw in September.

The Fed will probably stick to its latest rhetoric, remaining upbeat on the economy, forecasting solid growth and note that current policy is "just below" the range of estimates of neutral, while at the same time acknowledging mounting risks to the global economy. This will be no news for investors who will need to wait for next year’s data before reassessing their views on the Fed’s dot plot.

Options traders acknowledge this. A gauge of market expectations for large price swings in the euro over the one-week tenor stood at a five-year low on Thursday as expectations for an ECB hike are pushed back.

Price action into year-end may be choppy and noisy as liquidity issues arise and portfolio re-balancing before the Christmas holidays takes over. The probability of a partial US government shutdown may not weigh heavily on euro-dollar, while the common currency may find brief support from a resolution in Italy's budget rift with the EU.

Technically, any rallies toward 55-daily moving resistance at $1.1409 are expected to find fading interest, while a dip below $1.1216-$1.1217, the November 12 to 13 lows, targets the 61.8% Fibonacci retracement of the common currency's gains since early 2017 at $1.1187.

federal reserve  |  markets  |  euro  |  currencies


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