The US dollar ended last week on a solid footing with the dollar index testing the 94.16 resistance area (high from November 21) on Friday. However, the greenback seems to have lost momentum on Monday morning. The Federal Reserve, which will hold its last meeting of the year this week, is expected to lift borrowing costs by 25bps. Market participants have already priced in the decision. The 3m LIBOR has risen to 1.44% since mid-November, an increase of 20bps. According to the Fed funds futures, there is a 98% probability of a 25bps increase.
Therefore, investors will focus on the updated forecast for economic growth and interest rates. According to the last forecast, which was released in September, Fed members are expecting three rate hikes next year. A downward revision would send a very dovish message to investors, which would translate into a USD sell-off. Over the last few months, Fed members have systematically avoided to take strong positions regarding the monetary policy outlook. We anticipate that this behaviour will persist.
The ECB is also holding its last meeting of the year. We do not expect much from this meeting as it will likely be a non-event. The focus will be on Draghi’s press conference, which will follow the rate decision, and the updated inflation projections. We anticipate that Draghi will maintain his traditional neutral and cautious tone to avoid strengthening the euro.
EUR/USD fell more than 1% last week as the USD extended gains across the board. The single currency started the week on a firmer footing with EUR/USD climbing back to 1.18. We maintain our medium and long-term bullish view on the pair with the 1.25 target as first objective.