EUR/USD Monthly Fundamental Forecast – December 2015

Outlook and Recommendation

The EUR/USD closed the month near its lowest trading price at 1.0573 after falling to 1.056 just a week ago. The pair lost almost 4% for the month. The euro (EUR) will under-perform broadly in the coming year against most major currencies. European Central Bank President Draghi strongly hinted that additional monetary stimulus may be introduced at the December policy meeting in response to persistently low euro zone inflation. Prospective action may include changes to the operational terms of the ECB’s quantitative easing (QE) program as well as a cut in the key deposit rate (-0.20% currently). The revival of the euro zone/US policy divergence narrative that drove EURUSD 13% lower in the first quarter may provoke another sharp downward adjustment in the exchange rate in the next few months.

The Federal Reserve Board keeps investors on a rollercoaster ride regarding the timing of a first rate hike and a first timid move away from the zero line. In fact, in its latest statement, the FOMC signaled an increased probability of a higher Fed Funds rate at the mid-December meeting, underlining that concerns about international as well as financial market developments faded since September. This was immediately taken up by market participants. Fed Fund Futures were repriced and reflect a probability for a hike in December of 70% at the time of writing this document, up from around 34% on 27 October. We consider this to be the beginning of Fed guidance away from the zero interest rate bound. Across the Atlantic, Mr. Draghi was fairly outspoken about the ECB’s inclination to discuss further easing in the upcoming December meeting. In fact on average, markets do not expect a rate hike by the ECB for the next three years. Thus, the divergence of monetary policies is driven from both ends: the tendency to ease further, namely so by the ECB, BoJ and PBoC and at the other end, central banks which may feel comfortable enough to tighten the screw, such as the Federal Reserve and the BoE. The ECB will be first to move, as eurozone officials are expected to unleash rate cuts and a boost to their €1.1 trillion QE scheme this Thursday.

Meanwhile, US jobs figures scheduled for release at the end of the week are set to confirm that the Federal Reserve will raise its interest rates, until now unchanged in almost seven years. Financial market data suggests that money managers believe the chances of a rate rise this month now stand at 74pc.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

Major Economic Events That Will Affect The Markets In December