If the markets do not go against the Federal Reserve, they are ready to test the resilience of speculators. Despite the decline in U.S. stock indices and the likelihood of a loosening of the Fed's monetary policy in 2024, EUR/USD does not retreat from the levels of November highs. Hedge funds have increased net long positions in the U.S. dollar to the highest levels since March 2022, and the market is eager to test the threshold of their pain. When will speculators finally start exiting their long positions in the U.S. currency? And if they don't?

Dynamics of speculative positions on the U.S. dollar

The rapid rally of the S&P 500 in November led to widespread bullish forecasts for the broad stock index. Everyone was talking about its new records in 2024. Large banks mentioned figures of 5000, 5100. Who could offer more? And now Citigroup has finally decided to go against the crowd. According to the company, one of the best November rallies in the history of the U.S. stock market is coming to an end.

Indeed, it was based on the assumption that inflation in the U.S. would quickly return to the target, and the Fed, intending to achieve a soft landing for the U.S. economy, would not keep interest rates as high as 5.5%. However, the consensus forecast of Bloomberg experts suggests that the core personal consumption expenditure (PCE) index will finish next year at 2.5%. This is higher than the October estimate of 2.4%, not to mention the target of 2%. The main reason is the growth of inflation in the services sector.

U.S. inflation dynamics

If everything turns out as expected, what is the point for the Fed to ease its monetary policy? Market expectations of a 100 basis points reduction in borrowing costs to 4.5% seem exaggerated. The issue is not that the last mile of the fight against inflation looks as difficult as the representatives of the central bank like to repeat. The point is that, according to Deutsche Bank research, it lasts longer. In such a period, the best thing the Federal Reserve can do is sit back and watch events unfold. The federal funds rate will remain on a plateau longer than investors expect. Therefore, the rally in the S&P 500 and EUR/USD has indeed gone too far.

Surprisingly, representatives of the European Central Bank (ECB) seem not to understand that, with their seemingly "hawkish" speeches, they contribute to the decline of the euro. According to the head of the Bundesbank, Joachim Nagel, it would be premature to lower rates or discuss it. His colleague from France, Francois Villeroy de Galhau, claims that the best solution is to keep the cost of borrowing stable. He says there is currently no talk of increasing the dose or, in other words, further tightening monetary policy.

Such rhetoric strikes a blow to risky assets and puts pressure on the main currency pair, as it allows the safe-haven asset, the U.S. dollar, to raise its head.

Technically, the formation of the Double Top pattern on the daily chart of EUR/USD increases the risks of a decline in quotes. The reason for selling is the return of the euro below the pivot level at $1.094.