12.12.201900:55 Forex Analysis & Reviews: EUR/USD: Fed could do the dollar a disservice, and the ECB - to support the euro

This year has raised a lot of questions, namely: whether the trade war ends in the United States and China; will the United Kingdom succeed in secession from the European Union; whether the eurozone economy will recover; whether the US central bank will return the interest rate to where it started to reduce it for preventive purposes, etc. Thus, 2019 can be safely called the "year of doubt". Is it any wonder then that the EUR/USD pair is trading in the narrowest range in the euro's history, and the volatility of the single European currency has fallen to a record low? As soon as investors begin to win back any idea, the emergence of new information forces them to curtail their positions.

Another example of this was the reaction of EUR/USD to the latest statistical data from the EU. A weak release on industrial production in Germany contributed to the reduction of quotes for support at 1.1050. However, the subsequent rise in the European Sentix investor sentiment index above zero for the first time since May and the growth of the ZEW German economic sentiment index to a maximum value in almost two years brought euro buyers back into the game.

Progress in trade relations between Washington and Beijing, an increase in the likelihood of a "soft" Brexit, positive from German foreign trade, and the fact that Germany managed to avoid a recession increase the chances of economic recovery in the eurozone, which is a necessary condition for strengthening the single European currency in the next year.

Regarding short-term prospects, the upcoming meeting of the ECB Governing Council may provide support to the bulls on EUR/USD, where Christine Lagarde is expected to talk about the side effects of the negative rates policy, as well as the parliamentary elections in the UK, in which the Conservatives will likely take victory. However, rumors are circulating at Forex that if the new head of the European Central Bank refuses to support the position of its predecessor, Mario Draghi, this could undermine confidence in the ECB. Despite the titanic efforts of the ex-president of the ECB, inflation expectations in the eurozone continue to decline, and Lagarde's allusions to the rejection of negative rates will mean that the policy pursued by the regulator has stalled.

Meanwhile, the Federal Reserve will have to try very hard to give investors a surprise. Prior to the December FOMC meeting, its representatives claimed that monetary policy was in the right place. The derivatives market believes that until November 2020 monetary expansion from the Fed should not be expected, while the chances of restriction are completely low. Experts expect conservative forecasts on the interest rate from the Fed, as well as statements that it is at a neutral level, which does not slow down or stimulate the US economy.

In this regard, the ECB meeting, including the first press conference of Lagarde, the upcoming elections to the British Parliament and the upcoming increase in trade tariffs on Chinese imports by the US authorities seem to be much more significant events.

However, as it often happens, a phrase can cause serious changes in quotes. Fed Chairman Jerome Powell has sad experience with such speeches. Any signals on his part about the need to further stimulate the economy, as well as hints of additional injections of money into the system, can trigger a weakening of the greenback and an increase in EUR/USD.

If the bulls on EUR/USD manage to storm the resistance at 1.1110-1.1115, then the upward path will be open to them.