Dissecting the Markets: Fed Bets Fuel Dollar Flag Formation, Bears Eye 1.05 Breakout

In the lead-up to the Fed announcement, the EUR/USD pair remains confined around the major medium-term support level of 1.05. Neither side has mustered the momentum to break significantly higher or lower, and the currency cross shows little inclination to move beyond its narrow mid-week trading band. At the heart of this calm lies the near-universal belief among traders that a 25 bps reduction in the Fed rate is already priced in, as indicated by the pricing of interest rate derivatives such as overnight index swaps. Investors seem more attentive to the accompanying Summary of Economic Projections (SEP) and the so-called “dot plot.” Previously, the median SEP forecast in September pointed to a 3.4% fed funds rate by the end of 2025. Any significant revisions to growth, inflation, or interest rate expectations for the next year could quickly shift market sentiment and guide the USD’s next leg.
The US data calendar offers comparatively mild events before the Fed’s decision. Housing data for November is due, though no significant changes compared to the previous month's reading are expected, so all eyes are on the upcoming FOMC policy meeting.
Looking at the Dollar Index (DXY) chart, it is hard not to notice a nearly perfect flag formation, which is a textbook technical pattern often suggesting that trend continuation is brewing. This trend hinges on the resolution of an upcoming event, such as a central bank meeting. Another sign of building bullish pressure is the consolidation near the upper bound of the pullback channel, hinting at possible attempts by big market players to silently accumulate long positions on the USD in anticipation of a hawkish surprise from the Fed. The technical picture convincingly suggests that near-term risks are skewed to the upside for the USD. In other words, there is a high probability that the 1.05 level on the USD will likely face a decisive breach:

The Euro appears to hold its ground doing its best but support is apparently getting weaker. Investors remain skeptical about the Euro’s medium-term bullish prospects due to the ECB's predicted push toward its neutral interest rate, projected near 2% by mid-2025. Market participants widely anticipate that the ECB will progressively scale back rates at each meeting through June 2025. Officials in Frankfurt appear convinced that inflationary pressures will recede sustainably, allowing them to pivot confidently toward lower rates.
Regarding the EUR/USD technical chart, the DXY pattern discussed above serves as a crucial guide for interpreting the situation. The pair has experienced multiple fluctuations while attempting to break out of the 1.05-1.06 range. However, the evolving price action suggests that the FOMC decision will play a pivotal role in determining the pair’s future direction. Once a breakout occurs, market momentum is likely to follow, potentially driving a prolonged move and creating opportunities for traders aiming to capitalize on the continuation of the breakout:

The British Pound remains equally subdued, following the United Kingdom’s November inflation data that arrived in line with expectations:

Annual headline CPI rose to 2.6% year-on-year, inching up from 2.3% in October, while core CPI growth printed at 3.5%. Although core inflation fell just short of estimates (3.6%), it remains elevated enough to support market expectations that the BoE will keep its policy rate steady at 4.75% in its upcoming meeting. The likely 8-1 split, with MPC member Swati Dhingra favoring a 25 bps cut to 4.50%, underscores a debate within the BoE about the pace of easing down the line.
In the days ahead, Governor Andrew Bailey’s statements will be scrutinized for hints about the central bank’s timeline to relax monetary conditions more aggressively in 2025. Additionally, Friday’s UK Retail Sales for November will be watched closely for any signs of consumer strength or fatigue, potentially informing Sterling’s next steps.
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