Euro Risks Remain to the Downside as Fed May Do Little for Bulls

(Bloomberg) -- Euro bulls may not be able to count on the Federal Reserve meeting next week for support as European policy makers grow more concerned over the region’s growth prospects.

Data out of the euro area on Friday offered fresh ammunition to euro bears after European Central Bank President Mario Draghi noted the balance of risks is moving to the downside. The common currency may remain under pressure in the medium-term, heading toward important technical support at $1.1187.

The Federal Open Market Committee holds its final meeting of 2018 and policy makers are expected to increase interest rates by a quarter percentage point on Dec. 19, the fourth time this year. They are seen dialing back the number of moves next year to two, in March and September, from the three hikes economists saw in September.

The Fed will probably stick to its latest rhetoric, remaining upbeat on the economy, forecasting solid growth and note that current policy is “just below” the range of estimates of neutral, while at the same time acknowledging mounting risks to the global economy. This will be no news for investors who will need to wait for next year’s data before reassessing their views on the Fed’s dot plot.

Options traders acknowledge this. A gauge of market expectations for large price swings in the euro over the one-week tenor stood at a five-year low on Thursday as expectations for an ECB hike are pushed back.

Price action into year-end may be choppy and noisy as liquidity issues arise and portfolio re-balancing before the Christmas holidays takes over. The probability of a partial U.S. government shutdown may not weigh heavily on euro-dollar, while the common currency may find brief support from a resolution in Italy’s budget rift with the EU.

Technically, any rallies toward 55-daily moving resistance at $1.1409 are expected to find fading interest, while a dip below $1.1216-$1.1217, the Nov. 12-13 lows, targets the 61.8 percent Fibonacci retracement of the common currency’s gains since early 2017 at $1.1187.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

What to Watch:

• European Commission meets to consider Italy’s budget on Dec. 19 and may discuss starting the “excessive deficit procedure” that could result in stiff financial penalties
• Bank of Japan, Bank of England and Riksbank interest-rate decisions the following day
• Policy maker speeches include ECB President Mario Draghi and Vice President Luis de Guindos
• Economic releases include euro-area CPI and consumer confidence; U.K. inflation, retail sales; U.S. GDP, durable goods; see data calendar
• Quadruple witching is the simultaneous expiration date of stock index futures, stock index options, stock options and single stock futures. Expect elevated trading volume, particularly in the last hour of trading, on Friday, Dec. 21

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

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