Euro-Dollar Is a December Darling, But There Might Be No Party This Year

• Seasonals support EURUSD in December
• But ECB rate cut expectations are growing
• No reason to chase EUR/USD above 1.10 - Deutsche Bank

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December is traditionally a good month for the Euro to Dollar exchange rate as seasonality tends to be supportive, although the usual caveats apply according to one strategist we follow.

Writing on December 01, Derek Halpenny, Head of FX Research for EMEA at MUFG Bank Ltd, says, "there is a seasonal bias that is quite compelling for EUR/USD in December."

He observes that 14 Decembers from the last 20 years have seen a higher EUR/USD with an average gain over those 14 occasions an "impressive" 2.6%.

If December 2008 is excluded (EURUSD rose 10.1%), the average gain over the other 13 occasions was still substantial at 2.0%.

Furthermore, notes Halpenny, in 8 of the 11 occasions when EUR/USD moved higher in November, it was followed by a December gain.

In 2022, the U.S. Dollar dropped 5.0% in November, which was followed by a 2.3% drop in December.

Seasonality bodes well for Euro bulls as we stand on the cusp of a new month.

Above: Average move in EURUSD since EUR trading began in 1999.

But the usual caveats apply: past performance is no guarantee of future performance.

"This doesn’t mean we can ignore the fundamentals and certainly the prospects of that seasonal bias being evident in December 2023 would be helped if we began to see US economic activity slow. Without that, investors optimism over the recent," says Halpenny.

Crucial to how December pans out for Euro-Dollar will be next week's U.S. labour report.

Thursday's Eurozone inflation report is also important as it signals troubles could be brewing for the Euro.

The Euro fell sharply after Eurostat said Eurozone inflation fell to 2.4% year-on-year in November, from 2.09% in October, putting it a mere few points away from the ECB's 2.0% target.

According to George Saravelos, looking under the hood of the data reveals "the ECB is in trouble".

"We have been arguing in recent months that there is a real possibility that the ECB is forced to cut rates before the Fed," says Saravelos.

Deutsche Bank's economists show how, based on yesterday’s CPI figures, recent Eurozone inflation figures may already be below the ECB’s target of 2%.

"The risks of an ECB rate cut as soon as Q1 are rising. As we wrote earlier this week we see no reason to be chasing EUR/USD higher above 1.10," says Saravelos.

So, while seasonals are supportive of Euro-Dollar, prospective ECB rate cuts could spoil the party.