Last week ended for the euro with pressure from the dollar. The U.S. currency appreciated after hawkish words from two Federal Reserve representatives, and the EUR/USD pair fell.
The key speech was by the president of the Federal Reserve Bank of St. Louis, Alberto Musalem. He said the Fed needs to raise rates again in the near term because inflation remains too high and is unlikely to decline without additional action. In his words, policy still stimulates the economy and financial conditions remain loose, so an earlier hike will reduce risks. It is notable how quickly his tone changed. On October 8, Musalem had said that rates should rise over the next six to nine months, and at that time he did not support a move at the October meeting. Now he is effectively demanding that step, which means the timing, in his view, has been significantly shortened.
The second voice was the president of the Richmond Fed, Tom Barkin. He said the direction of policy is already clear; the question is only the pace. In addition, he stated that the boom in investments in artificial intelligence is strengthening inflation from the demand side — that is, when money is spent faster than the economy can produce goods. I should remind you that he does not have a vote this year, but the market still considers his opinion. In October, Barkin already warned that such processes would have to be paid for at some point —and when, nobody knows. Now he says the same thing but with a more practical conclusion.
I remind you that at the October 28 meeting the rate was kept in the 3.75–4.00% range, and two committee members, Lisa Cook and Beth Hammack, voted for a hike. Kevin Warsh did not give a clear answer about December at that time, and now two of his colleagues have effectively hinted at where the committee may move.
Today market attention will shift to Europe. Manufacturing purchasing managers' indices for October will be released. This is a survey of purchasing managers, where a value above 50 points indicates growth and below 50 indicates contraction. The forecast for Germany is 54.2 points, the same as a month earlier, and for the eurozone as a whole, 52.4 points, also unchanged from the previous value. Economists do not expect changes, and that is a good sign, since the indices remain noticeably above the 50 mark. After strong eurozone GDP in the third quarter, such figures are doubly important. Any downward deviation would raise questions about how sustainable this growth is, while an upside surprise would add arguments for the rate-hike camp.
No less interesting will be the speech by the president of the Bundesbank, Joachim Nagel. He last spoke on October 16 in Bangkok at the IMF meeting. Then he said that the European Central Bank had raised key rates twice and, if the situation does not change, further steps cannot be ruled out. He noted that the market expects another 25-basis-point hike in December and that he does not see a new financial crisis in Europe. After the ECB's decision to hold rates and news about Christine Lagarde's departure in February, his words carry additional weight, since Nagel is named among possible candidates for the head of the central bank.
Momentum
The euro is now at 1.1186, fourteen pips above the lower breakout level and nineteen below the upper one. From below, the reference is 1.1172. During the night, the pair fell below that mark to 1.1155, but it couldn't hold and returned higher, so the first touch didn't become a breakout, and buyers were already showing up here. A breakdown with confirmation could lead to 1.1138 and 1.1108, and such a scenario is possible if Nagel's speech disappoints and the dollar continues to rise after Musalem's and Barkin's remarks. From above 1.1205 is in play. A breakout pushes the euro to 1.1231, and then to 1.1254. For this move, strong European business activity indices are needed, and economists' flat forecasts would be a pleasant surprise. For now I would give a slight edge to growth, but hawkish Fed statements leave the dollar chances.
Mean Reversion
For the euro, the upper reference 1.1197 stands eight pips below the breakout point 1.1205. This is needed when price stretches upward but runs out of steam before reaching the level. If the pair rises to 1.1197, finds no continuation, and falls back, I consider selling with a stop above the highest point of the failed attempt. But if it calmly passed 1.1197 and approached 1.1205, the reversal is canceled, and instead the upside breakout scenario begins to work.
The lower reference 1.1163 stands nine pips below the breakout level 1.1172. Here, I look for long positions if price briefly drops below 1.1163, finds no continuation, and returns above 1.1172; I place the stop under the lowest point of the failed attempt. But if it passes 1.1163 and calmly stays below, this is the development of a downward breakout, and buying is not allowed. The night picture actually showed a similar attempt: the pair dropped to 1.1155 but immediately returned. At the moment of the release of the European indices and Nagel's speech, I would protect stops, because the reaction can jump over any level.
