Last week, while the Federal Reserve changed its rhetoric from ‘hiking to fight inflation at all cost’ to ‘slow the pace of rate hike’, seismic waves rolled over the markets.
As we approach the last central bank meetings of the year, the ECB meets on (15th Dec), Fed on the (14th Dec). A temperature check on the expected path of rates for the 2 major central banks would give us a good sense to position ourselves.
The Fed
After Fed Chair Jerome Powell’s speech last Wednesday at the Brookings Institution in Washington, one line in particular (“The time for moderating the pace of rate increases may come as soon as the December meeting.”) shifted the market’s perspective. With the USD weakening further and terminal rates repricing slower and lower than expected, markets seem to have priced in a 50-basis point hike by the Fed in its December meeting. A slowdown from the back-to-back 75 basis point hikes we have come accustomed to.
As noted in the chart above the EURUSD pair has generally moved alongside the dollar direction, should the dollar continue its tumble downwards, the EURUSD is likely to trade higher.
The ECB
After raising rates by 75 basis points in the last meeting to 1.5%, the ECB still faces mounting inflation. Market expectations still swing between a 50 to 75 bps hike for the upcoming ECB meeting as the Eurozone still struggles with high inflation. The ECB may also have more headroom to maneuver as current rates remain below the expected terminal rate and the 200 basis points hike still pales in comparison to the Fed’s 375 basis points move.
However, we do have to caveat that intricacies matter here, for example, the inflationary effects in the US are largely driven by the demand side, while in the Eurozone are driven by supply-side effects. Regardless, the next few days will remain key for any policymaker comments to guide the markets as the meeting date nears.
Policy timing and direction uncertainty put the EURUSD pair on our watchlist. The last time the 2 central banking policy timelines diverged, we called it out on one of our previous ideas. You can check out here.
Additionally, we spot an ascending triangle pattern on the chart which generally signifies a bullish continuation. With the previous ascending triangle breaking out in a textbook manner, we will watch if the current setup trades the same. Prices have also broken a previous support-turn-resistance level, which could prove as further conviction of the upward move.
With a clear technical setup and the potential for the ECB to surprise hikes to the upside, we lean bullish on the EURUSD pair. We set our stop at the 1.0440 level, and take profit level at 1.0900, with each 0.00005 increment per EUR in the EURUSD futures contract equal to 6.25$.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/gopro/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Sources:
www.cmegroup.com/mar...x.contractSpecs.html
www.ecb.europa.eu/pr...7~df1d778b84.en.html
www.federalreserve.g.../powell20221130a.htm
As we approach the last central bank meetings of the year, the ECB meets on (15th Dec), Fed on the (14th Dec). A temperature check on the expected path of rates for the 2 major central banks would give us a good sense to position ourselves.
The Fed
After Fed Chair Jerome Powell’s speech last Wednesday at the Brookings Institution in Washington, one line in particular (“The time for moderating the pace of rate increases may come as soon as the December meeting.”) shifted the market’s perspective. With the USD weakening further and terminal rates repricing slower and lower than expected, markets seem to have priced in a 50-basis point hike by the Fed in its December meeting. A slowdown from the back-to-back 75 basis point hikes we have come accustomed to.
As noted in the chart above the EURUSD pair has generally moved alongside the dollar direction, should the dollar continue its tumble downwards, the EURUSD is likely to trade higher.
The ECB
After raising rates by 75 basis points in the last meeting to 1.5%, the ECB still faces mounting inflation. Market expectations still swing between a 50 to 75 bps hike for the upcoming ECB meeting as the Eurozone still struggles with high inflation. The ECB may also have more headroom to maneuver as current rates remain below the expected terminal rate and the 200 basis points hike still pales in comparison to the Fed’s 375 basis points move.
However, we do have to caveat that intricacies matter here, for example, the inflationary effects in the US are largely driven by the demand side, while in the Eurozone are driven by supply-side effects. Regardless, the next few days will remain key for any policymaker comments to guide the markets as the meeting date nears.
Policy timing and direction uncertainty put the EURUSD pair on our watchlist. The last time the 2 central banking policy timelines diverged, we called it out on one of our previous ideas. You can check out here.
Additionally, we spot an ascending triangle pattern on the chart which generally signifies a bullish continuation. With the previous ascending triangle breaking out in a textbook manner, we will watch if the current setup trades the same. Prices have also broken a previous support-turn-resistance level, which could prove as further conviction of the upward move.
With a clear technical setup and the potential for the ECB to surprise hikes to the upside, we lean bullish on the EURUSD pair. We set our stop at the 1.0440 level, and take profit level at 1.0900, with each 0.00005 increment per EUR in the EURUSD futures contract equal to 6.25$.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/gopro/
Disclaimer:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Sources:
www.cmegroup.com/mar...x.contractSpecs.html
www.ecb.europa.eu/pr...7~df1d778b84.en.html
www.federalreserve.g.../powell20221130a.htm
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