EUR/USD Monthly Forecast – December 2018

The EURUSD pair has been trading locked inside a wider price band since last week of October with price pattern in weekly chart forming a zig zag pattern as new and event driven momentum saw both sides of pair play tug of war for control. On the upside the pair faces two levels of resistance at 1.1499 & 1.1423 while the downside sees strong support at 1.1295 & 1.1210 respectively. The month opened positive for Euro well above 1.14 handle but by the end of first week the pair lost all its early gains and was back to neutral level. The gains was Euro in first week was mostly due to cautious investor stance across globe as US election was under progress which saw divided outcome much in line with market expectations as Republicans kept the Senate and Democrats took the House. However Dollar gained positive momentum immediately after US election as outcome had already been priced in market’s price action and FOMC update saw November interest rate remain unchanged while forward guidance was positive. Euro also saw issues in form of Italian budget announcement which was rejected by the EU.

Italian Budget Woes Pressured EURO in Broad Market

The second week was highly negative for EURO as Italian budget woes and spread difference in IT-DE bond pushed EURO all the way into 1.12 handle. Italy once again submitted budget plans without any changes which greatly weighed down common currency as no change in budget put Italy at odds with EU which caused spread difference to move above 300 resulting in pair trading bearish across the week. However second week closed positive for EURO on news of positive proceedings between China & US in regards to trade war talks and ECB Draghi’s comments that QE easing was to go ahead as planned and end by December 2018 despite signs of slowdown in Euro area’s economic growth & outlook. The third week saw price action range bound near monthly highs. Comments from President Trump which indicated that he wanted a deal with China pushed the pair above 1.14 handle. USD was weakened in broad market as equities fell at start of holiday week triggering a bearish rout in global equities ahead of much expected and awaited thanks giving holidays which helped Euro maintain upper hand across the week amid a liquidity think holiday market.

However the week saw the pair close on relatively neutral stance as EURO was weighed down by continued spread widening between IT-DE bonds and as the German Finance ministry cautioned about growth continuing at a slower pace looking forward. The last week saw the pair move in a subdued range bound price action well within monthly high and lows. Euro was week at start of week weighed down by widening spread difference between Italy & German bonds and news of European Commission initiating excess deficit procedures against Italy after the nation refused to substantially alter its budget proposals.This was further aggravated by positive greenback owing to good retail and online sales for black friday and thanksgiving festival season. However comments from Italian Deputy PM’s about willingness to change target of budget deficit as long as the main measures in the budget remain unchanged inspired some positive activity surrounding common currency. The pair closed on positive note at close of the month as Federal Reserve Chair Jerome Powell said he thinks U.S. interest rates were just below neutral which was taken by many investors as a tip that the rate hike cycle was nearing its end which put a dent in US Greenback’s outlook causing EURO to gain positive price action.

Dollar’s Weakness Helped Fundamentally Lacking EURO Close On Positive Note

Powell’s dovish remarks took the currency markets by surprise as he noted that the policy rate, at 2-2.25 percent, is now “just below” the broad range of estimates of neutral, which in September was 2.5-3.5 percent. This is in stark contrast to his words from October, when Powell said rates were a “long way from neutral at this point”. The Fed chairman’s remarks led to the dollar weakening across the board, especially versus riskier currencies and assets and this greatly helped EURO maintain positive price action across the last week. But gains were capped despite subdued demand for USD as Italy’s ruling party La Lega’s economic adviser, Armando Siri said that the government was considering to reduce the budget deficit to 2.2% or 2.3% which was in contradiction with a report by Reuters that stated Italy’s plans to bring the deficit target down to 2%. Overall, news and event driven momentum provided highly volatile market activity with opportunity for both sides of market to see some level of gains but failed to breakout of wider price band limitations.

Moving forward for month of December, the pair is going to be very choppy and sideways in general, but that’s nothing new as it has become the domain of high-frequency traders. This pair is not the first choice of investors when they think of long term moves. End of year is usually noisy and the pair can be expected to display erratic price action driven by news, macro data and geo-political events but highly unlikely for any event or news to bring the pair out of wider price band limitations. However in case Brexit deal passes through UK parliament in an unexpected move there is high chance that pair will break resistance at 1.1500 mark while aside from no-deal brexit scenario if no-confidence vote on PM May comes to pass then pair could fall below 1.1100 mark and is the most highly anticipated news of the month.