The EUR/USD currency pair closed up 12 pips at 1.10 euros per dollar on Monday, after Eurostat said eurozone industrial production grew 0.6% in October after a decline in September of 0.3%, beating economists' expectations for a 0.2% rise. Earlier in the day, European Central Bank (ECB) president Mario Draghi said in remarks delivered in Bologna, Italy, that he expects current stimulus will be enough to return eurozone inflation to the goal of just under 2%, though officials stand ready to boost stimulus if needed. Two weeks ago, the ECB trimmed their inflation outlook for 2016 from 1.1% to 1%. The inflation forecast for 2017 now stands at 1.6%, instead of the previous prediction of 1.7%. 

The currency market shrugged off both the eurozone industrial production data and Draghi’s remarks, as traders may wait until after the FOMC meeting. The probability of a rate hike at the Fed’s FOMC meeting on December 15-16 based on the 30-day prices of federal funds futures jumped to 81% from 79% from the previous week, according to data from the CME Group as of December 11. Traders may not find anything new with Mr. Draghi’s remarks, as he delivered a similar speech earlier this month at the Economic Club of New York, where he said that, "There cannot be any limit to how far we are willing to deploy our instruments, within our mandate, and to achieve our mandate". 

The euro has appreciated 3.59% against the U.S. dollar since December 3, when the ECB announced at the Governing Council that they would cut the overnight deposit rate to minus 0.3% from minus 0.2%, and leave its key lending rate unchanged at 0.05%, while extending purchases of government bonds and other assets from the September 2016 target date through at least March 2017. Analysts had expected the ECB to drop the overnight rate to minus 0.4% and the key lending rate to zero from 0.05%, and to expand the 1.1 trillion euro bond-buying program by 360 billion euros.

Ewald Nowotny, president of the National Bank of Austria and member of the ECB’s governing council, came out last Wednesday to defend the previous week’s ECB monetary decision and told reporters in Vienna that, “It was absurd what expectations were expressed,” … “I believe it was really a massive failing of market analysts. I don’t believe the ECB’s communications policy gave a false signal.” Nowotny’s remarks sent the euro surging 1.24% that day against the dollar, as currency markets interpreted that as additional quantitative easing is unlikely.

Goldman Sachs is now backtracking on their call for euro-dollar parity. According to The Wall Street Journal, Goldman’s chief FX strategist Robin Brooks wrote in a note last Monday that the bank now sees the euro at $1.07, $1.05 and $1 in three, six and 12 months, respectively. Previous forecasts for those time horizons had been $1.02, $1 and $0.95. Goldman Sachs had said in March that the euro would hit parity with the dollar by September.

As of December 8, there are 182,251 short positions of euro FX, traded on the Chicago Mercantile Exchange (CME), by leveraged funds, a week-over-week decrease of 15,470 short positions. This is compared to about 42,876 long positions, up 1,881 from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC). During the week ending December 8, hedge funds have increased their net long positions about 17,351 contracts, where euro FX contracts are traded in units of 125,000 euros. 

Technically, the EUR/USD currency pair has been trading in a symmetrical triangle band, between the 1.045 and 1.155 dollars per euro levels. The hedge funds are cutting back their short positions, as the currency pair is moving upward in a bullish descending broadening (DES/B) wedge.

A headwind for the dollar could be coming from the People’s Bank of China (PboC), as the bank set the daily reference at 6.4358 yuan to a dollar on Friday, the lowest since August 5, 2011, according to the PBoC’s China Foreign Exchange Trade System. Since China stunned financial markets by devaluing the yuan in August, the PBoC move would be to sell dollars to support the yuan. Tommy Xie, a Singapore-based economist at Oversea-Chinese Banking Corp, told Bloomberg News that he hasn’t seen any decisive intervention this week, but they may come back in after next week’s FOMC meeting.

Another headwind for the dollar is the U.S. high-yield bond market, which sooner or later will blow up, according to Carl Icahn, activist investor and fund manager of $30 billion Icahn Capital Management. Tumbling crude oil prices put more of a squeeze on small energy companies that sell high-yield, or junk bonds, to finance their operations. There could be as much as $212 billion worth of U.S. energy junk bonds out there, according to Bank of America Merrill Lynch. Standard & Poor's Ratings Service recently warning that a 50% of energy junk bonds are "distressed," meaning they are at risk of default.