Forex and Cryptocurrency Forecast – Action Forex

EUR/USD: Old News from the Fed And the ECB

The past week was the week of the Central Banks. The US Federal Reserve met on Wednesday, December 15, for the last time this year, the ECB and the Bank of England on December 16, and the Bank of Japan at the end of the working week, on Friday, December 17.

There is a trading model, FIFO: short for “first in, first out”. So, we will follow it, and we will begin to consider the results of the meetings in order in which they took place.

The first, as already mentioned, was the meeting of the FOMC (Federal Open Market Committee) of the US Federal Reserve. Some investors expected any radical decisions from it, and the rhetoric of representatives of the Federal Reserve on Wednesday was more hawkish than expected. This pushed the EUR/USD pair towards the lower limit of the three-week side channel. However, having reached the level of 1.1220, it turned around and the dollar began to lose ground.

The market realized that, in fact, almost all parameters of the monetary policy remained unchanged. Only the quantitative easing (QE) program was revised: the rate of reduction in asset purchases increased from $15 billion to $30 billion per month. The program can be completely closed in March-April 2022.

The outlook for the labor market was slightly improved but was accompanied by concerns about the possible emergence of “new virus variants”. Core inflation in 2022 may also be slightly higher: not 2.3%, as previously expected, but 2.7%. Inflation for 2023 is projected to grow by only 0.1%, and it will remain unchanged in 2024.

According to the Financial Times, despite aggressive statements, the Fed still considers inflation a temporary phenomenon, and expects to return it to the target range within two years, gradually raising federal funds rates.

The key interest rate was left unchanged at 0.25% at the last meeting. As for the regulator’s plans for next year, if it was about two or three rate hikes earlier, the Fed’s dot chart showed that there should be three of them now. But this is just a declaration of intentions that can be realized if the macroeconomic situation develops as expected by the regulator.

In general, all statements of the American central bank were devoid of any specifics this time. Markets learned what they already knew before. Therefore, their reaction was appropriate: the EUR/USD pair turned around and went north. Having passed 140 points on Thursday, December 16, it was already at the upper border of the side channel, at the level of 1.1360.

(Of course, this was not without the help of the pound, which, thanks to the decision of the Bank of England, put a lot of pressure on the dollar. We will talk about this in more detail below).

The results of the meeting of the European Central Bank did not surprise investors either. Like the Fed, the European regulator also raised its inflation forecast for next year. And it also considers it a temporary phenomenon. It declares this openly though and does not consider it necessary to fight it now. It was announced Once again that the refinancing rate will remain at the current level until inflation reaches the target level of 2.0%, at which it will remain for a long time. As a result, the “main” result of the meeting was the statement of the head of the bank, Christine Lagarde, that “it is very unlikely that we will raise rates in 2022”. And this was already known to everyone.

The dovish position of the ECB did not allow the EUR/USD pair to rise above the borders of the side channel, and anxiety about the Omicron strain pushed it sharply down, and it ended week trading session at the level of 1.1238.

As for the coming week, it is pre-Christmas. And seven days after Christmas, it’s New Year’s Eve. In the absence of large players, the market these days is quite thin, liquidity is low, which can be fraught with all sorts of surprises. This is increased volatility, gaps with serious gaps in quotations, and what traders call the “Santa Claus Rally”. Although, of course, the opposite option is also possible: with “lazy” movement of pairs in a narrow range.

As for the experts, 50% expect further strengthening of the US currency and the fall of the EUR/USD pair, 30% are betting on the growth of the euro. The remaining 20% have taken a neutral position. Among the oscillators on D1, 80% point to the south (although 15% of them are in the oversold zone), 10% point north, and 10% point east. 100% of the trend indicators side with the bears.

Resistance levels are in the zones and at the levels 1.1265, 1.1300, 1.1355, 1.1380, 1.1435-1.1465 and 1525. The nearest support level is 1.1225, then 1.1185 and 1.1075-1.1100

The economic agenda of the year is practically exhausted, and no extra-important news is expected in the coming week. As for the reasons for breaking the trend or increased volatility, we can note the publication of annual data on US GDP on Wednesday December 22, and data on orders on capital goods and durable goods published by the U.S. Census Bureau the next day, December 23.

GBP/USD: The Bank of England’s First Step

We noted in the previous review that the No.1 task for the GBP/USD bulls is to overcome the key resistance in the 1.3285-1.3300 zone. And we predicted that if the Bank of England did raise the interest rate on December 16, it would not be a problem. This is exactly what happened.

While the Fed and the ECB are only swinging, the Bank of England has moved to attack rising prices. After inflation in the UK rose to 5.1%, reaching a 10-year peak, the regulator raised the rate for the first time in three years from 0.1% to 0.25%. The decision was made despite the worsening epidemiological situation due to the new Omicron coronavirus strain. However, according to the head of the Bank of England Andrew Bailey, it is more important to curb the price pressure on the economy and society.

Of course, the rate hike by 15 basis points cannot be called significant, but, most importantly, the first step has already been taken, and the market expects the second rate hike in February.

It is difficult to say why many financial publications write that the current decision of the Bank of England came as a complete surprise. If you look at our previous forecast, 40% of experts predicted a rate hike and, as a result, the subsequent strengthening of the pound.

But the British currency failed to consolidate the victory. Having risen on Thursday December 16 to the high of 1.3373, the GBP/USD pair turned sharply and went down. Investors began to sell off the pound due to growing concerns about Omicron. Risk aversion contributed to the strengthening of the safer dollar and, accordingly, dealt a blow to the stock indices and quotes of the euro and the British pound, which ended the five-day period at 1.3235.

The experts’ forecast for the coming week looks rather pre-holiday, that is, uncertain. 35% of them side with the bulls, the same number side with the bears, and the remaining 30% prefer not to take sides. Among the oscillators on D1, the situation is similar: 30% of them indicate buying, 45% are selling, and the remaining 25% advise to take a break and do nothing for now. The trend indicators have a fundamentally different mood: 100% are colored red.

The supports are located at 1.3210-1.3220, then 1.3170-1.3190, 1.3135, 1.3075. In case of a breakout of the latter, the pair may fall down to the horizon of 1.2960. Zones and resistance levels – 1.3285-1.3300, 1.3340, 1.3370, 1.3410, 1.3475, 1.3515, 1.3570, 1.3610, 1.3735, 1.3835.

There will also be little macro-statistics important for the pound next week. Of particular interest are the UK GDP data for the Q3, which will be released on Wednesday, December 22. But the markets will focus on the situation with the spread of the new COVID-19 wave.

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