Hot Forecast for EUR/USD on 02.12.2024

Despite the acceleration of annual inflation in the Eurozone from 2.0% to 2.3%, the euro failed to rise and even weakened. Although the scale of the decline was limited, it still seems illogical. The issue is that most market participants focus on the data highlighted by the media, which tends to emphasize monthly figures rather than annual ones. As it turns out, while annual inflation increased, consumer prices in monthly terms decreased by 0.3%.

From the perspective of macroeconomic analysis, annual data holds more significance, as it is less prone to distortions caused by seasonal fluctuations. On the other hand, due to these seasonal factors, monthly data can appear quite odd, making conclusions based on them fundamentally flawed. It's worth noting that all reports and meeting minutes from key central banks refer specifically to annual inflation, not monthly changes. Thus, the European Central Bank's decisions will be based on accelerating annual inflation to 2.3%, not the 0.3% monthly price decline. However, the media currently gives the impression that the ECB might continue to lower interest rates.

This perception is likely to strengthen further, supported by labor market data. According to forecasts, the unemployment rate in the Eurozone is expected to rise from 6.3% to 6.4%. Therefore, the euro may experience a slight further decline.
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Forecast for GBP/USD on December 4, 2024

The movement of the pound sterling within the range of 1.2612–1.2708 since November 14 appears to be consolidation, with false breakouts on both sides on November 22 and 29. Following this logic, the price may now attempt a genuine breakout below the lower boundary of the range, targeting a retest of the 1.2510 support.

However, this plan faces resistance from the Marlin oscillator, which has turned upward from the neutral zero line on the daily chart. If this is not the start of a sustained upward movement, it is at least a sign of consolidation. As a result, the price may remain within the range for another 1–2 days until the release of U.S. employment data on Friday.

Today, the UK will release November PMI indexes. Business activity in the services sector is expected to decline from 52.0 to 50.0, while the composite PMI may weaken from 51.8 to 49.9. This could increase the likelihood of the price dropping below the range.

On the H4 chart, the price is struggling with the balance line support. The Marlin oscillator has twice turned downward from the zero line, increasing the likelihood of the price successfully breaking through the support.

Below the 1.2612 level, the price will encounter the MACD line at 1.2582. For a successful break of this level, the price might first consolidate below 1.2612.
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The Fed remains cautious despite expectations of a rate cut

The head of the Federal Reserve System, Jerome Powell, in his recent comments stressed that the strong US economy gives the central bank the opportunity to be cautious about changes in interest rates. According to Powell, the economy is in good condition, and there is no reason to expect changes in this direction.

At the same time, despite the reduction in interest rates by the Fed, the cost of borrowing for citizens has not changed significantly. This is because rates on most loans, such as mortgages and credit cards, depend on the yield of 10-year U.S. bonds, which have recently reached high levels despite efforts to reduce inflation.

Powell noted that the current economic situation leaves many uncertainties, including in light of possible changes in the trade policy of the new administration of President Donald Trump. He also expressed hope for constructive relations with the new Government.

The issue of the Fed's independence also remains relevant. Some of Trump's economic advisers have suggested giving the president more influence over the regulator's decisions, although many experts emphasize the importance of the central bank's independence for the stability of the economy and the US dollar.
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The main events by the morning: December 17

The European Union has imposed the 15th package of sanctions against Russia. The construction giant PIK and the airline UTair, as well as the head of Avtodor Vyacheslav Petushenko, were subject to restrictions. The sanctions affected 52 tankers carrying Russian oil, top managers of fuel and energy sector companies and heads of Gazprom subsidiaries: Gazprom Fleet, Gazstroyprom and Gazprom LNG Technologies.

The Moscow Stock Exchange index fell to a one-year low, reaching 2,395 points. The market is reacting negatively to the speeches of the president and the Minister of Defense, new sanctions and the expectation of a decision on the key rate. Rostelecom's shares have fallen to the lowest value since 2022 – 50 rubles. The collapse of MTS Bank continues, whose securities have lost 60% since the IPO. The largest drop was demonstrated by «Samolet» – since the beginning of the year, the company's shares have depreciated by 79%, falling from 3,851 to 845 rubles per paper.

Donald Trump has announced plans to impose or increase tariffs against a number of countries. At a press conference at the Mar-a-Lago estate, the president-elect stressed that the United States will be guided by the principle of reciprocity: if a trading partner imposes duties on American goods, the United States will impose similar measures in response. The list of countries potentially subject to new duties may include Brazil, India and China.

US Senator Bernie Sanders criticized the US defense budget, which reached almost $900 billion. According to him, inflated defense spending limits funding for health and social care programs. Sanders also spoke about large-scale fraudulent schemes at the Pentagon, where defense companies overestimate the value of contracts by 40%.

South Korea has imposed sanctions against 7 individuals and 13 organizations from Russia. The reason was the accusation of illegal military cooperation with the DPRK. In total, 11 people and 15 organizations were included in the list, including two generals of the Korean People's Army, a rocket engineer and one officer.
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EUR/USD: Powell arranges sell-off. EUR plunges to 2-year low. Parity on horizon?

The EUR/USD pair plunged to 1.0351 with a single-session fall of 1.32%. The instrument recorded its lowest close in two years. This slump was triggered by unexpectedly hawkish statements from the Federal Reserve, which made it clear that no rate cuts are anticipated in January.

According to the updated FOMC forecasts, only two rate cuts are expected in 2025, significantly fewer than previous estimates. This adjustment in expectations led investors to reassess their positions. As a result, this entailed a sharp drop in stock indices, a rise in US Treasury yields, and, consequently, a strengthening of the dollar.

Despite being just six days before Christmas, markets faced another unpleasant surprise. Under the influence of the Fed's hawkish statement, the S&P 500 index tumbled by 2.95%, marking its steepest post-meeting decline since 2001.

The reaction also extended to the debt market. Higher yields on US Treasuries compared to other countries provide investors with an additional incentive to invest in the US. The yield on benchmark 10-year Treasury bills jumped by 11.5 basis points, surpassing 4.5% for the first time since May. In comparison, the yield on 10-year German bonds is only about 2.29%.

According to strategists, the Fed's intention to moderate the pace of rate cuts is bearish for the US dollar due to the widening short-term interest rate differentials with the eurozone.

Analysts are closely monitoring changes in the FOMC's dot plots, which reflect individual committee members' expectations for future interest rates. The latest snapshot indicates a cumulative rate cut of 50 basis points in 2025 (two steps of 25 bps each), twice lower than the 100 bps forecasted in September and below the 75 bps expected by market consensus before the update was released.

The revised forecasts reinforced the outlook for a higher funds rate, with the long-term median dot now projected at 3.0%. This suggests that the current rate-cutting cycle will end at a higher level than previously anticipated.

At the same time, economic forecasts were revised upwards: the annual inflation rate for 2025 is now expected at 2.5%, up from the earlier estimated 2.1% increase. Most FOMC members believe core inflation will continue to decline in 2025.

Jerome Powell noted that the latest rate cut was a difficult decision and confirmed the Fed's intention to slow the pace of monetary policy easing. He emphasized that before any further rate cuts, the central bank expects clearer progress in reducing inflationary pressures and will not tolerate inflation persistently above the 2% target.

As a result, markets are revising their expectations, preparing for a prolonged pause in the Fed's easing cycle. This scenario could keep the US dollar elevated through 2025, further pressuring the euro. Could parity be on the horizon?

Temporary rebound in EUR/USD

During Thursday's European session, the EUR/USD pair managed to climb back above the 1.0400 level, as the bullish momentum of the US dollar slightly weakened following Wednesday's sharp rally.

However, fundamental signals still do not provide a basis for a shift in the overall negative trend. Both short-term and long-term exponential moving averages (EMAs) reveal the bearish trend.

The 14-day Relative Strength Index (RSI) broke below the lower border of the bearish range at 20.00 to 40.00, signaling the formation of a new downtrend.

From a technical viewpoint, the key support level for the EUR/USD pair could be 1.0200, provided it breaks below the two-year low at 1.0330.

In the case of an upward correction, the nearest significant obstacle for bulls would be around the 1.0500 zone, where the 20-day EMA is recognized.
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Inflation falls to 2.4%: Markets respond with gains, but week remains a loss

US stocks rally after weak trading
After two straight losing sessions, US stocks ended the week on a positive note, as encouraging inflation data and comments from Federal Reserve officials eased investor concerns about future interest rate moves.

Inflation is slowing: Key data
The published Personal Consumer Expenditure (PCE) index, one of the main indicators of inflation, showed an increase of 2.4% year-on-year in November. This figure was slightly lower than economists' forecast of 2.5%. This result strengthened hopes that inflationary pressures continue to subside despite the resilience of the economy.

Consumers continue to spend
Consumer spending data showed an increase in November, which was further evidence of the resilience of the US economy. This fact, despite subdued inflation, supports confidence that demand remains stable.

Rate expectations are shifting
The publication of fresh data led to a change in market sentiment. Now traders are forecasting the first cut in the Fed's key rate in March 2025, and the second in October of the same year. Previously, the probability of a second cut before the end of 2025 was estimated at only 50%.

At the same time, on Wednesday, the Fed announced a third rate cut this year. However, according to the updated economic forecasts (SEP), the Fed expects only two rate cuts of 25 basis points in 2025, instead of the four announced earlier in September. This more conservative approach reflects the continued resilience of the economy and the difficult situation with inflation.

Market reaction: sell-offs and recovery
The Fed's announcement triggered a wave of selling on Wednesday evening, from which the market was unable to recover even on Thursday. However, Friday's rally partially offset the losses. Despite this, the main US stock indexes - the Dow Jones, S&P 500 and Nasdaq - showed an overall decline for the week.

The role of fiscal policy
Uncertainty about fiscal policy, including the possible impact of tariffs, also received attention from Fed officials. Some of them acknowledged that they have begun to factor these risks into their forecasts. Such an approach may influence the regulator's further actions, adding another factor to the equation of economic stability.

Market Correction: Experts Say
"It's pretty obvious what's happening — it's just that this PCE plus the dovish comments from the Fed have offset the market's overreaction to the hawkish cut that everyone was expecting," said Jay Hatfield, CEO of Infrastructure Capital Advisors in New York.

He added: "We've seen this about 10 times during this Fed cycle. The market just always overreacts to one side or the other."

Key Indexes Are Gaining
The Dow Jones Industrial Average (.DJI) added 498.82 points, or 1.18%, to 42,841.06. The S&P 500 (.SPX) rose 63.82 points, or 1.09%, to 5,930.90. The Nasdaq Composite (.IXIC) added 199.83 points, or 1.03%, to close at 19,572.60.

The Dow and S&P both saw their biggest gains in a single day since Nov. 6.

A Week of Controversy
However, all three major indexes ended the week lower overall. The S&P 500 lost 1.99%, the Nasdaq lost 1.78%, and the Dow fell 2.25%. The Nasdaq ended a four-week winning streak, while the S&P 500 posted its biggest weekly loss in six weeks. The Dow also fell for a third straight week.

Sectors on the Rise
Despite the weekly decline, all 11 major S&P sectors posted gains on Friday. Real estate (.SPLRCR) led the way, rising 1.8% as Treasury yields fell. The broad rally showed investors are willing to return to active buying despite recent wobbles.

Small-caps: New prospects
Small-cap stocks tracked by the Russell 2000 (.RUT) rose 0.9%. These assets often benefit from a lower interest rate environment, making them an attractive choice for investors in the current environment.

Congress Averts Crisis
Investors were closely watching developments in the U.S. Congress on Friday, which took steps to prevent a partial federal government shutdown. House Republican leaders said they would vote to keep the government open, adding stability to the market.

Broad Gains in Stocks
Advance stocks outnumbered decliners 2.84-to-1 on the New York Stock Exchange on Friday, while the Nasdaq outnumbered decliners 2.12-to-1. The S&P 500 posted three new 52-week highs and 23 new lows, while the Nasdaq posted 51 new highs and 233 new lows.

Triple Witchcraft and Volume Boost
Friday's session was made special by the simultaneous expiration of quarterly equity, index option, and futures derivatives contracts, known as the "triple witchcraft." This event significantly boosted trading volume, which totaled 21.58 billion shares, well above the 14.87 billion average over the past 20 trading days.

December's Challenges: Looking Ahead
December has so far disappointed investors, turning out to be one of the most challenging months for the market in an otherwise strong 2024. The S&P 500 has gained 24% year-to-date, but continues to struggle. Traditionally, the last five trading days of December and the first two days of January, known as the "Santa Claus Rally," average gains of 1.3%. However, this year could see a departure from that trend.

Fed Disappointment, Sectors in the Red
The S&P 500 suffered its biggest daily drop since August on Wednesday after the Fed disappointed investors by offering a less aggressive rate cut for 2025. There are also problems beneath the surface, with eight of the 11 S&P 500 sectors in the red in December and the S&P 500 down 7%.

Rising Bond Yields and Overvalued Stocks
Another source of tension in the market is rising Treasury yields. The 10-year yield rose to 4.55%, the highest in six months. Matt Maley, chief market strategist at Miller Tabak, said the rise is putting pressure on stocks, especially with the S&P 500 trading at 21.6 times projected earnings, well above the historical average of 15.8.

Santa Claus Rally: Hopes and Reality
The Santa Claus Rally period, which covers the last five trading days of the year and the first two Januarys, traditionally brings gains to the market. Historical data shows that 90% of such periods have predicted a positive outcome for the year. However, in 2024, experts like Carlson suggest that the main gains have already occurred in November, when the market gained 5.7% amid political events.

Market Narrowing: A Warning Sign
A narrowing rally, with fewer stocks gaining, is also a cause for concern. It could mean the market is becoming less resilient, which in turn dampens investors' holiday spirits.

Tech Giants Show Strength
Some mega-cap companies continue to delight investors. Tesla (TSLA.O) and Alphabet (GOOGL.O) have shown impressive results, rising 22% and more than 13%, respectively, in December. Broadcom (AVGO.O) was another winner, with shares soaring 36% on expected strong demand for its AI chips, pushing the company's market value above $1 trillion.

Trouble Below the Surface
But such gains are becoming increasingly rare. The number of S&P 500 stocks that are falling has outnumbered those that are advancing for 13 straight sessions, the longest losing streak since 2012.

In addition, the percentage of S&P 500 stocks trading above their 200-day moving averages has fallen to 56%, the lowest in a year, according to data from Adam Turnquist of LPL Financial.

Analysts Take a Cautious Approach
"We recommend waiting for support to establish and momentum to improve before intensifying dip-buying," Turnquist wrote in a research note issued after a significant sell-off in the market on Wednesday.
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Oil Compresses the Spring: Awaiting an Explosion!

The upper levels can't, and the lower levels won't? Speculators have increased their oil purchases at the fastest pace since September 2023, driven by expectations that new sanctions against Russia and Iran will tighten supply, while China's stimulus measures will boost demand. However, Brent crude oil prices remain stubbornly stagnant, neither rising nor dropping significantly. Is a revolutionary situation brewing in the oil market? If so, any breakout from the current medium-term range may have to wait until 2025. After all, Christmas is typically a time to pause business activities.

Dynamics of Speculative Positions in Oil

U.S. President Joe Biden signed a government funding bill that extends through March 2025, which has brought joy to financial markets. A slowdown in the U.S. economy caused by a government shutdown would have been detrimental to investors. Currently, the U.S. is a key driver of global GDP growth and oil demand. Bloomberg experts project a decrease of 2 million barrels in U.S. crude oil inventories for the week ending December 20, which is likely to support Brent and WTI oil prices.

However, China, India, and other Asian countries are expected to be the primary contributors to global oil demand growth in 2025, accounting for approximately 60% of the increase. OPEC forecasts an increase of 1.45 million barrels per day (b/d), while the International Energy Agency (IEA) estimates it at 1.08 million b/d.

Global Oil Demand Structure

However, the reality may not be as optimistic. The U.S.-China trade war is likely to slow down the Chinese economy. In 2023, China accounted for 16% of global oil demand, equivalent to 16.4 million barrels per day (b/d), an increase from just 9% in 2008. However, the country's strong demand for electric vehicles and its ongoing real estate crisis are reducing its appetite for oil. Gasoline and diesel fuel demand is believed to have peaked and is projected to be 3.6% lower in 2024 than it was in 2021.

U.S. tariffs on imports from China are causing concern in the oil market. For example, Donald Trump's statement that the European Union could face tariffs if it doesn't increase purchases of U.S. oil and gas diminished bullish momentum for Brent crude. Consequently, the price of this North Sea grade quickly returned to consolidation, and its price movement now resembles a spring that is being compressed. The question remains: when will it explode?

Oil concludes 2024 with mixed sentiments. Optimists expect to see growth in global demand, particularly from Asia and the U.S. In contrast, pessimists warn that non-OPEC+ countries may inundate the market with new supplies, potentially leading to a decrease in prices.

From a technical perspective, a triangle pattern continues to form on the daily Brent chart. A breakout above the upper boundary near $74 per barrel could create opportunities for long positions. On the other hand, a decisive breach of the $72 support level would suggest the potential for selling. An aggressive short entry might be considered if the price successfully tests the fair value at $72.45.
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