Bulls and bears of the EUR/USD pair impulsively react to the current information flow. The initiative is to change hands, but in fact the price stalls above 1.0500 but below 1.0600. The fifth figure acts as a springboard for a large-scale attack, which will inevitably occur next week. The only question is in which direction, down or up. Obviously, the vector of the EUR/USD price movement will depend on the Federal Reserve and the European Central Bank: next week the central banks will sum up the year results and outline further prospects.
In the meantime, traders have to act cautiously, so to speak, "according to the situation". The intraday market sentiment is changing fast, but all the downward and upward price bursts are short-lived. For instance, on Friday morning, EUR approached the limits of the 6th figure, marking 1.0589. Amid a nearly empty economic calendar, the forecast of currency strategists of Danske Bank had a certain influence on the pair. This forecast was interpreted by the market in favor of the single currency (and not in favor of the dollar). Danske Bank economists expect the ECB policy rate to peak at 2.75% in the first half of 2023, but the risks will be shifted towards a further increase. At the same time, they revised their hawkish forecast on the pace of monetary tightening by the Fed. According to them, the Fed will increase the rate twice more by 50 points (in December and February) and once more (in spring) - by 25 points.
As a rule, such forecasts have a limited (and short-term) influence on the pair, but under current circumstances, apparently, traders especially pay more attention to this analytical report.
But again - in anticipation of the high-profile events that will take place next week, any price spikes are temporary in nature. On Friday afternoon, the bears took the initiative, reacting to the inflation report. The US producer price index was published at the beginning of the US trading session on Friday, which did not disappoint the dollar bulls, contrary to pessimistic expectations.
The overall PPI in annual terms came out at 7.4% (with the forecasted slowdown to 7.2%). On the one hand, it was expected to slow down, but, on the other hand, the rate of deceleration was not as fast as previously expected. The core index, excluding food and energy prices, reached the 6.2% target year-on-year, while most analysts predicted a decline to 5.9%. The situation here is similar: the index has been declining consistently for the past 8 months, but the rate of decline slowed in November.
The pair then retreated from the daily highs, going down to the base of the 5th figure. The greenback received additional support from another report, which was released in the U.S. We are talking about the consumer sentiment index from the University of Michigan. This index showed positive dynamics contrary to the pessimistic forecasts. Thus, in December the index grew up to 59.1 points while experts expected further decline down to 55 points.
However, the downward dynamic of the pair is likely to be of limited nature. It's just that the aforementioned reports turned out to be in favor of the dollar, and so the bulls locked in profit, not risking to leave short positions till Monday. The notorious "Friday factor" played its role here, which weighed on the pair.
But taking into account the current fundamental background, we can say with confidence: both short and long positions on the pair are risky. Even within the fifth figure.
Next week, the pair is likely to experience the strongest price turbulence, even before the announcement of the Fed verdict. The day before that event, i.e. on December 13, the key report of the Consumer Price Index growth will be published in America. If it reflects further slowing of inflation growth in the US, the market will play a conditionally dovish outcome of the Fed meeting in advance, i.e. the dollar will be under strong pressure. But if the report is contradictory, it is difficult to predict the reaction.
So, taking into account the high degree of uncertainty, it is risky to open longs or shorts for the pair. It is better to take a wait-and-see position. Big events of the forthcoming week will completely redraw the current picture - both fundamental and technical.
