EUR/USD: Weak PMI, the "yellow jackets" and the expectation of the Fed

After Friday's rise to one and a half year highs, the dollar index today slowed down and returned to 96 points. The strengthening of the US currency was due to weak data from China and strong data from the US. However, the dollar rally did not continue due to the upcoming Federal Reserve meeting, the results of which will be known the day after tomorrow.

But on Friday, the dollar bulls were inspired by US data on the growth of retail sales. First, the October data were revised upwards - from 0.8% to 1.1%. Second, in November, the indicator came out better than expected, although it de facto fell to 0.3%. However, following the release of data on inflation growth, Friday's figures provided strong support to the dollar against the backdrop of growth in consumer activity and lending. After all, in addition to the indicator of retail sales, last week data on the growth of industrial production in the United States were published. This indicator jumped by 0.6% in November, being stronger than the forecast (0.3%).

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In other words, the US data renewed confidence that the Federal Reserve on Wednesday will not only raise the rate, but will also take a "hawkish" position on the future prospects of monetary policy. Although this issue is quite controversial (due to recent talk about the search for a neutral rate), the fundamental picture for the dollar looks undoubtedly better than the euro.

The single currency came under pressure of not only macroeconomic but also political factors. French PMI indices in the services and manufacturing sector fell under the key 50 mark - for the first time this year. German indicators also came out in the "red zone", showing a slowdown. Composite PMI index in the eurozone sharply fell in December to 51.3 - although last month was at 52.7 points. Weak PMI figures are fully consistent with the slowdown in economic growth in the eurozone, which was recorded in the third quarter of this year – let me remind you that GDP growth in the eurozone slowed to four-year lows.

On top of that, European inflation also brought it down - the consumer price index fell to two percent (with a forecast of 2.1% from the previous value of 2.2%), and core inflation excluding volatile energy and food prices returned to 1%, although experts were confident that the indicator will remain at the October level, that is, at around 1.1%. Against the background of these results, Mario Draghi's position at the last meeting of the ECB looked even optimistic – at least the head of the central bank did not rule out the tightening of monetary policy within the next year.

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However, it is too early to talk about it. The bulls of EUR/USD are still satisfied with the fact that the European Central Bank completed QE on time, while the next steps of the ECB look too vague. Uncertainty puts pressure on the single currency, as well as the political situation in many European countries – primarily in France. The ongoing protests of the so-called "Yellow Jackets" unnerve the markets, especially against the backdrop of the Italian budget crisis. On Saturday, Paris hosted another (fifth) round of protests: about 70,000 people took to the streets of the city. And although it is almost two times less than in the past, it is too early to talk about the intensity of protest sentiments: most likely, bad weather conditions (almost zero air temperature + heavy rain) are to blame for everything.

Local demands for lower fuel prices have grown into political manifestos - now protesters demand to move to direct democracy through referendums on key issues of the country's life. In other words, the protest movement in France is taking a protracted form with rather unpredictable consequences. On the one hand, many experts say that the protest in its current form is not supported by all the French (much less than during the first wave of rallies). On the other hand, if Macron is forced to resign, then early elections will be held in the country, and the risk of a political crisis will increase in many ways.

Thus, today's corrective growth of the euro-dollar pair is primarily due to the hypothetical problems of the US currency. First, on the eve of the Fed meeting, traders were still anxious over the central bank's further actions. Secondly, there was a risk of a shutdown again in the United States. The US government may stop work on December 22 due to disagreements over the construction of the wall on the border with Mexico. According to the American press, the White House has already begun to conduct advance preparations for the implementation of this scenario.

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All this suggests that the EUR/USD pair is unlikely to demonstrate strong volatility until Wednesday – only if Italy or Brexit does not present any surprises in the news plan. From a technical point of view, the pair remains within the downward movement until the price fixes above 1.1360 (the average line of the Bollinger Bands indicator on the daily chart, which coincides with the Tenkan-sen and Kijun-sen lines). In this case, the Ichimoku Kinko Hyo indicator will form a "Golden cross" signal, which will determine further growth to the level of 1.1390 (the lower limit of the Kumo cloud). The nearest target of the downward movement is 1.1280 - the lower line of the Bollinger Bands indicator on the same timeframe.

The material has been provided by InstaForex Company - www.instaforex.com