12.12.202320:48 Forex Analysis & Reviews: EUR/USD: Is the bullish counterattack too soon?

If the market doesn't go where investors expect it to, it will move in the opposite direction. EUR/USD grew tired of waiting for a "bear" attack due to the stabilization of U.S. inflation and the hawkish tone from the Federal Reserve (Fed). Strong statistics on German economic sentiment indices from ZEW and rumors of a faster winding down of the European Quantitative Easing (QE) acted as catalysts for the euro's break above $1.08. However, this breakout looks very much like a false start.

In December, the prospects for German investors unexpectedly improved. The expectations index rose, contrary to Bloomberg expert forecasts of a decline, setting a positive tone for the fifth consecutive month. This suggests optimism, raising the question of whether the leading economy in the Eurozone has already hit bottom and begun to recover.

Dynamics of German Economic Sentiment Indices

Moving forward, investors were stirred by rumors that the December ECB meeting would not be calm. Allegedly, the central bank will surprise the markets with an announcement of a faster tapering of the QE program, which was initially intended as a remedy for recession linked to the pandemic and is now deemed unnecessary in the absence of COVID-19. If the ECB balance sheet contracts more rapidly, it would be good news for EUR/USD.

However, without expectations of monetary expansion from the Fed in 2024, euro bulls are unlikely to counterattack. These expectations seem overstated. For instance, Bank of America believes that if CPI data is close to Bloomberg expert forecasts of 3.1% for consumer prices and 4% for core inflation, derivatives will be forced to shift the timing of the first Fed fund rate cut from May to June. This would halt the rally in U.S. stock indices and strengthen the position of the U.S. dollar.

ECB Balance Sheet Dynamics

It feels like major players are deliberately trapping the market crowd, provoking premature purchases of EUR/USD. Data releases on the German economy and expectations of accelerated European QT are not the events to buy euros. However, if someone knows that U.S. inflation continued to slow down in November, and consumer prices are around 2.7–2.8%, the euro rally against the U.S. dollar will gain momentum. Let's see. Fortunately, the wait won't be long.

I maintain the opinion that the stock market continues to run ahead of itself, driven by greed. It should be understood that the reckoning will come sooner or later. Sooner is better. The scenario in which the Fed stops the S&P 500 bulls, triggering a correction in the stock index and causing EUR/USD to drop even lower, is the baseline. However, the Federal Reserve will still cut rates, putting pressure on the U.S. dollar in the medium term.

Technically, on the daily chart of EUR/USD, bulls managed to play an inside bar. However, a rebound from resistances at 1.081–1.0815 and 1.084 should be considered a reason to sell. We will consider returning to buying if the pair rises above 1.0865.