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In a Financial Times interview, Cleveland Fed President Loretta Mester put emphasis on the duration of maintaining restrictive monetary policy to ensure that inflation reliably returns to the 2% target. That's contrary to market expectations, which centers on timing and extent of rate cuts.

Mester's key statement, "The next phase is not when to reduce rates... It's about how long do we need monetary policy to remain restrictive in order to be assured that inflation is on that sustainable and timely path back to 2%,"

"The markets are a little bit ahead. They jumped to the end part, which is 'We're going to normalize quickly', and I don't see that," she added.

When the discussion eventually shifts to the timing and pace of rate cuts, Mester highlighted the importance of one-year forward inflation expectations and their alignment towards the 2% target.

"If you don't take action as expected inflation comes down, then you're really firming policy," she warned. "You don't want to inadvertently become more restrictive than you think is appropriate."

EURUSD found a footstep and firmed on Monday after 0.9% drop last Friday, following a double failure at psychological 1.10 barrier.

However, recovery is unlikely to extend much as near-term action is weighed by much weaker-than-expected German Ifo data and rising bearish momentum on daily chart.

Also, long upper shadow on last week’s candlestick and repeated failure to register a weekly close above 1.10 barrier, add to negative signals.

Slight bullish bias can be expected while the price holds above cracked Fibo pivot at 1.0900 (38.2% retracement of 1.0723/1.1009 upleg), but more work at the upside will be required (close above 1.0950) to sideline downside threats.

Caution on break of 1.0900 handle and nearby 20DMA (1.0875) which would risk deeper drop on completion of reversal pattern and a double-top (1.1009/03).

Res: 1.0942; 1.0965; 1.1000; 1.1017.
Sup: 1.0900; 1.0875; 1.0866; 1.0832.

• German business confidence weaker than expected

The euro has started the week in positive territory on Monday. In the European session, EUR/USD is trading at 1.0914, up 0.18%.

It was a week of sharp swings for the euro, which posted strong gains during the week but reversed directions on Friday and declined 0.88%. Still, the euro posted a winning week, rising 1.2% against the US dollar.

German business confidence dips

Germany’s Ifo Business Climate was softer than expected, dropping to 86.4 in December. This was down from a revised 87.2 in November and missed the market consensus of 87.8. Business conditions and business expectations also eased in December and were shy of the forecast, as companies remain pessimistic about the German economy. The lack of confidence mirrors the prolonged weakness in the German economy.

December PMIs indicated contraction in both the services and manufacturing sectors. Germany, the largest economy in the eurozone, also reported a decline, with the PMI falling to 48.4, down from 49.6 in November and short of the consensus estimate of 49.8. The services industry has contracted for five straight months while manufacturing has been mired in contraction since June 2022.

ECB stays hawkish

The European Central Bank held the benchmark rate at 4.0% for a second straight time on Thursday. This move was expected but the central bank pushed back against market expectations for interest rate cuts next year, sending the euro soaring over 1% against the US dollar after the announcement.

There is a deep disconnect between the markets and the ECB with regard to rate policy. The ECB remains hawkish and Reuters reported on Friday that ECB governors are unlikely to cut rates before June. The markets are marching to a very different tune and have priced in at least in around six rate cuts in 2024, with the initial cut expected around March. Lagarde has insisted that the central bank’s decisions will be data-dependent rather than time-dependent and she may have to join the rate-cut bandwagon if inflation continues to fall at a brisk pace.

EUR/USD Technical

• EUR/USD is putting pressure on resistance at 1.0929. Above, there is resistance at 1.0970
• 1.0855 and 1.0814 are providing support

ECB Governing Council member Bostjan Vasle expressed skepticism about market expectations for imminent interest rate cuts, considering them "premature," both in terms of timing and the overall scope of such moves. This perspective challenges the market's anticipation of monetary easing, which currently sees 50-50 chance of a rate cut by March, with a full cut expected by April

Vasle emphasized that the current market pricing "has lowered the level of restriction". Additionally, the accommodation priced into by interest rate expectations seems to be at odds with the monetary stance required to steer inflation back to the target.

Additionally, Vasle indicated that ECB would likely wait until at least the end of Q1 before considering any changes to its stance. This approach is grounded in the need for more comprehensive data, which will only be available around March or April. he added, "We will need to understand the underlying trends better, and we need the new projections, too."

On the inflation front, Vasle posited that inflation could rebound at the year's turn, potentially hovering between 2.5% to 3% through the first half of the next year. Vasle said, "So it's appropriate to wait and observe price growth through this period and reassess our outlook."

Germany's Ifo Business Climate fell from 87.3 to 86.4 in December, below expectation of 87.8. Current Assessment index fell from 89.4 to 88.5, below expectation of 89.5. Expectations index fell from 85.2 to 84.3, below expectation of 85.8.

By sector, manufacturing fell from -13.8 to -17.2. Services rose from -2.5 to -1.7. Trade fell from -22.2 to -26.6. Construction fell from -29.5 to -33.1.

The Ifo Institute's statement encapsulates the current sentiment, noting that "companies were less satisfied with their current business" and expressing a more skeptical view of the first half of 2024. The acknowledgment that "the German economy remains weak as the year draws to a close" is telling of the challenges facing Europe's largest economy.

Full German Ifo business climate release here.

The Dollar made a crucial technical breakdown the previous week following a public admission from the Fed of a policy reversal. The Fed’s comments and subsequent press conference pressed the Dollar index under its 200-day moving average. The decline continued on Thursday as neither the Bank of England nor the ECB acknowledged that they were ready to cut rates as the Fed.

As a result, the dollar index collapsed 2% in two days, the sharpest sell-off since July. Back then, it was the final chord of the Dollar’s fall before the start of a long climb. There is no slight chance that a bottom will begin to form in the Dollar near current levels and a subsequent reversal to growth.

The fundamental reason for the dollar’s sell-off was a powerful reassessment of interest rate expectations. As soon as the Fed agreed with the markets to build 3 rate cuts into the forecasts in 2024, the markets demanded twice as many – six rate cuts. According to FedWatch, futures are pledging a 15% chance of a rate cut on 31 January and an 80% chance on 20 March 2024. Two months ago, when the dollar index was forming a peak, it assumed a 40% chance rate would be higher than current rates in March and a 50% chance in January.

Six rate cuts are hard to justify against a background of an economy growing beyond expectations: retail sales are increasing, wages are rising faster than inflation, and jobs are being created at a healthy pace.

It’s more likely that the ‘rate expectations’ are the result of technical factors at work, as too many investors sold US government bonds before October but have found them attractive in recent weeks. The speed of recovery in US equity and bond markets has created an environment of not just FOMO but shorts’ destruction, intensifying amplitude, and helping markets jump above headwinds or reasonable macroeconomic valuations.

We may well see a normalisation of expectations in the coming days and weeks, which will work for the Dollar and probably deflate excessive optimism from the equity market. Added to this is the difference between how badly Europe is doing (except for the pace of wage growth) and how well the US is doing (except for housing sales). The current situation can be compared to the recovery from the financial crisis, when the chronically weak growth of the Eurozone crystallised with the very buoyant growth of America, forming a long-term trend of strengthening the dollar index since 2011.

• Gold manages to halt the pullback from its recent record high
• But rebound meets strong resistance at important ascending trendline
• Momentum indicators suggest that positive momentum is fading

Gold had been in a steep uptrend since November 10, recording a fresh all-time high of 2,144 before experiencing a solid correction. Although the bulls attempted to erase this pullback, the upward sloping trendline drawn from its October lows, which previously acted as support, rejected further advances.

Given that both the RSI and MACD remain in their positive zones, the price could edge higher to challenge the April resistance of 2,032. A violation of that zone could pave the way for the recent rejection region of 2,048, which also held strong in April and May. Further upside attempts could cease at the April peak of 2,079 ahead of the record high of 2,144.

Alternatively, if the price reverses lower, a couple of previous resistance regions such as 2,009 and 1,987 could act as the initial lines of defence. Sliding beneath that floor, bullion could test the December bottom of 1,973. Even lower, the October support of 1,954 may provide downside protection.

In brief, gold seems to be trading back and forth after posting a fresh all-time high. However, the positive technical picture remains intact as the price holds comfortably above the 2,000 psychological mark.

Early Monday’s action is holding within a narrow consolidation following Friday’s 0.6% pullback which left a double-top (1.2793/90).

Cable remains constructive above daily Tenkan-sen (1.2647) but needs to clearly break above cracked Fibo barrier at 1.2719 (61.8% of 1.3141/1.2037) to bring bulls fully in play for fresh push towards targets at 1.2800/37 (round-figure / 200WMA).

Daily moving averages are in bullish setup but positive momentum is fading (14-d momentum indicator is at the midline) contributing to near-term directionless mode.

Violation of daily Tenkan-sen to generate initial bearish signal and risk deeper drop towards 1.2589 (broken Fibo 50%) and 1.2502/00 pivots (daily Kijun-sen / Dec 13 higher low) loss of which will be bearish.

Res: 1.2719; 1.2746; 1.2800; 1.2837.
Sup: 1.2647; 1.2612; 1.2589; 1.2500.

On Friday, the rate dropped below 1.366 for the first time since the beginning of August. This was facilitated by fundamental drivers:

→ The US dollar weakens after the Federal Reserve meeting, which signaled the possibility of lowering interest rates next year. Powell said monetary tightening is likely complete and discussions about cuts are "on the horizon."

→ On the contrary, the Bank of Canada remains more hawkish. In a speech on Friday, its chief Tiff Macklem said it was too early to consider cutting interest rates as inflation remained stubbornly above target.

Also, the weakening of the US dollar could have been influenced by disappointing news about Flash Manufacturing PMI values in the US: actual = 48.2, expectations = 49.5, a month earlier = 49.4.

We wrote about bearish signs on the chart back on December 1st.

The current 4-hour chart shows that:

→ the USD/CAD price forms a downward channel (shown in red). What is noteworthy is that the price dropped to its lower limit (potential support);

→ the RSI indicator indicates a strong oversold market;

→ the price only dropped slightly below the September low, and then consolidated intraday - forcing attention to the formation of a false breakout of the low.

Taking into account the above arguments, it is worth assuming a scenario of a rebound from the lower border of the channel. For example, it is possible that the price will test the area 1.346-1.348, or the former support 1.355, resistance from which may be strengthened by the median line of the channel.

This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.

Crude spiked lower on Friday, but then stabilized on volume late in US session when price moved slightly higher. Energy also stays up after the news that N.Korea fired an unspecified ballistic missile toward East Sea. From an Elliott wave perspective, price is also eyeing higher, we are seeing room for wave C/3 to around $75. In that area we see some consolidation back from start of December and the 61.8% Fib of the previous decline that can be finished because of five waves down, and break out of a downward channel.