Daily Market Recap – EURUSD Euro up slightly after Fed & ECB meeting

The decisions that the ECB has just announced are quite close to what the markets were expecting and have therefore led to a controlled reaction. A rise in the EUR/USD, a slight improvement in stock prices and a slight rise in yields. All in all, a slightly positive assessment of the markets.

PEPP, the program set up to fight the pandemic, will end in March but can “be resumed, if necessary”; the PEPP reinvestment period has been extended to the end of 2024 instead of 2023.

The only divergence from expectations is the offsetting increase in the PPP. Purchases will begin at 40 billion monthly in the second quarter of 2022 (as expected) but will decrease to 30 billion in the third quarter and return to 20 billion starting in October. The markets were expecting 40 billion euros for the rest of the year.

Yesterday, the Federal Reserve provided multiple indications that its ultra-accommodative policy since the start of the Covid pandemic is coming to an end, by taking aggressive action in response to rising inflation.

First, the central bank said it would accelerate the reduction of its monthly bond purchases. The Fed will buy $60 billion in bonds each month starting in January, half the level before the November taper and $30 billion less than it bought in December. The Fed reduced by $15 billion a month in November, doubled that amount in December, and then will accelerate the reduction again in 2022.

After that, in late winter or early spring, the central bank plans to start raising interest rates, which were held steady at this week's meeting. Projections released Wednesday show Fed officials see up to three rate hikes in 2022, two the following year, and two more in 2024.

The market reacted only slightly as the decisions were in line with investors' expectations. A slight decline in the dollar was recorded against most currencies, which could reflect the unwinding of long positions before the end of the year.

From a technical perspective, the EURUSD has been in a horizontal channel between 1.1383 and 1.1220 since the beginning of December. This sideways consolidation is taking place within a downtrend below the descending oblique and could persist with the year-end break.

The exit from this phase will determine the next wave. If it is done from below, the pair will have to extend beyond the support on 1.1170 and could continue in this case towards the psychological threshold of 1.1000 and then the technical threshold under 1.0800.

 (Chart Source: Tradingview 16.12.2021)

Conversely, the crossing of the descending oblique and top of the channel would validate a probable recovery to 1.1525.

Disclaimer: This material has been created for information purposes only. All views expressed in this document are my own and do not necessarily represent the opinions of any entity.