Watch this space as the EURUSD could enter the holiday season with a bang!

Later in the week, investors will be served a central bank combo featuring the Federal Reserve (Fed) and European Central Bank (ECB). Expectations remain elevated over the policy divergence between the Fed and ECB dragging the EURUSD lower this month. But before we discuss what to expect from these two central bank heavyweights, it is worth keeping in mind that the euro has depreciated against most G10 currencies since the start of December. Things also look rough for the currency quarter-to-date, especially against the Swiss franc and dollar.

On the monthly charts, bears remain in the driving seat as there have been consistently lower lows and lower highs.

The same can be said on the weekly timeframe, but strong support can be found around 1.1240 – 1.1200.

While the policy meetings between the two banks could trigger volatility, the question remains whether this will be enough to push the EURUSD out of its current range?

What to expect from the Fed?

Grab your popcorn and find a comfy seat as the Federal Reserve’s December policy meeting could be entertaining. With US inflation increasing at the fastest pace in nearly 40 years, equity markets on a rollercoaster ride, and the Omicron variant fuelling uncertainty – everyone wants to know what steps the Fed will take.

After ‘talking above talking about tapering’ for many months, the Federal Reserve made an official announcement in November on tapering their bond purchases in their quantitative easing program. Fast-forward today, the Fed is expected to announce an acceleration of tapering from January 2022 to counter inflation. This move will also allow US interest rates to be raised sooner than expected. In fact, traders are currently pricing in a 71% probability of at least one rate hike by early May 2022 and fully pricing a 25-basis point hike by mid-June 2022.

Nevertheless, it may be wise to keep a close eye on the Fed’s new dot plot and updated economic forecasts. Remember back in September, policymakers pencilled the odds of one rate hike in 2022, followed by three in 2023 and another three in 2024. The new dot plot is expected to show the majority of Fed members now expect two rate hikes in 2022. This could inject dollar bulls with renewed confidence against the euro and other G10 currencies.

How about the ECB meeting?

The ECB faces questions over its asset purchases as this meeting was expected to be something of a “big bang”.

Given how the fourth wave of Covid-19 is sweeping across Europe and the Omicron menace disrupting economic activity, the central bank is likely to strike a cautious note. Markets expect the ECB to confirm that the 1.85 trillion-euro Pandemic Emergency Purchase Programme (PEPP), launched in March 2020 will end in March 2022. It will be interesting to see whether the ECB still sees inflationary pressures as transitory, especially when considering how eurozone inflation is currently at a record high of 4.9%. One key question is how the ECB feels about Omicron and what this means for the economic outlook. Should the central bank maintain a highly accommodative stance with doves in the driving seat, this is likely to pressure the euro beyond this month.

EURUSD poised to break below 1.12?

The policy divergence between the Federal Reserve and European Central Bank remains an ongoing theme that continues to pressure the EURUSD.

Taking a look at the technical picture, the EURUSD remains in a range on the daily charts with support at 1.1200 and resistance at 1.1370. With prices trading below the 200, 100, and 50-day Simple Moving Average, bears remain in a position of power. A breakout could be on the horizon with the central bank meetings acting as the fundamental catalyst for bulls or bears. Should prices secure a solid daily close below 1.1200, this could open the doors towards 1.0930. Alternatively, a breakout above 1.1370 may see prices challenge 1.1530.

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