Fed’s Dovish Pivot Weighs on Dollar. PCE Data Ahead
EUR/USD’s Bearish Signal: The Double Top.
The greenback took a heavy hit last week, following the last Fed meeting of 2023, which brought new dovish insights into the Fed’s plans for rate cuts in 2024.
Throughout last week, the US Dollar Index (DXY) dropped from a high of 104.262 to a low of 101.770 and closed the week at 102.594. This downturn was largely due to a decrease in U.S. Treasury yields, triggered most likely by the Federal Reserve’s recent shift in approach.
The Fed has now shown a more positive perspective on inflation and has started discussions about potential rate cuts, indicating a 75 basis point reduction in 2024 during its year-end meeting. This change in strategy took investors by surprise, leading to a rapid decrease in interest rate forecasts.
The US Dollar is expected to remain on a downward trend in the short term, mostly due to growing confidence among market participants that the Fed will substantially soften its stance within the next year. Nonetheless, these expectations could shift if upcoming economic data suggests strong growth or persistent inflation.
Key Data for the Week Ahead
The beginning of the week will be light in terms of major releases but the action picks up Wednesday with the release of the U.S. Consumer Confidence survey. This is a leading indicator of consumer spending but it is not known as a big volatility generator. The release is scheduled for Wednesday at 3:00 pm GMT.
The U.S. Final GDP will come out Thursday at 1:30 pm GMT, at the same time as the Philly Fed Manufacturing Index. The Final version of the GDP tends to have the least impact out of the three (Advance, Preliminary, and Final) and the Philly Fed Manufacturing index is considered a medium-impact indicator.
The main event of the week will be the release of the Core PCE Price Index, which is rumored to be the Fed’s preferred inflation gauge, scheduled for Friday at 1:30 pm GMT. If the PCE shows an uptick, it would indicate that the economy is still going strong, which could ignite hawkish talks about the monetary policy.
Technical Outlook – EUR/USD
Although the pair rallied, the bulls failed to break the key resistance at 1.1000, and on Friday we saw a bounce that took the price 100 pips lower. This shows that there is still some steam left for the US Dollar bulls and that the pair may drift lower.
This second bounce at 1.1000 created a double top, which is a bearish pattern. On top of this, the RSI is showing a lower high (while the price is printing a double top), which is a form of bearish divergence and further favors a move lower.
If the bulls manage to break the double top and consequently the resistance zone at 1.1000, the pair could disregard the bearish divergence and travel north, toward the next resistance zone located at 1.1175 – 1.1200. Otherwise, we might see a ranging market, considering that the Winter Holidays are drawing closer and volatility may be affected.
