Technical background:
Major linear regression channel: downwards
Minor linear regression channel: upwards
Moving average (20-day period; smoothed): sideways.
On Monday, EUR/USD keeps trading in the sideways channel where it has been stuck for almost a month. The channel is located between 1.1230 and 1.153 that are Murray levels of 0/8 and 2/8. On Friday, the pair dropped to the lower border of this channel. So, it is hardly surprising that the price pulled back from this line and started a new round of an upward correction. In the coming days, the euro may rise to the level of 1.1353 which is actually not a very significant level. Currently, the euro/dollar pair is staying near its yearly lows and may resume the downward movement below 1.1230 at any moment. We should keep in mind that this is the end of the year, and the Christmas week will be followed by New Year's Eve. Naturally, the market activity and volatility of the pair are decreasing just like the chances of leaving the sideways channel. Thus, it will be hardly surprising to see the pair stuck within the range of 1.1230 - 1.153 for the next few weeks. Notably, the important decisions on monetary policy that were announced by the ECB and the Fed have not affected the technical picture of the pair in any way. True, the euro first rose by 130 pips, which was not supported by anything, but then fell by the same 130 pips (also for no reason). So, the price simply returned to the levels where it started its movement last Wednesday. It makes no sense at all to talk about the further trajectory of the pair in the next few days or even a couple of weeks. There will be no macroeconomic data and fundamental events during this time. Consequently, markets can trade the pair following the trend, but this is unlikely to be based on macroeconomic or fundamental factors.
Will ECB support EUR?
Last week, the European Central Bank announced the results of its meeting. According to them, the PEPP program will be completed in March next year and the APP program will be expanded by €20 billion. Then, over the next two quarters, the asset purchase programs will be reduced by the same amount. So next year, the European economy will see a gradual tapering of the monetary stimulus programs. But will this be enough for the European currency to develop growth? On the one hand, the euro has been falling for a long time. We still believe that the main reason for this was the Fed's tightening of its monetary policy as well as market expectations for a rate hike next year. However, this factor cannot support the US dollar for a long time. Therefore, sooner or later, the pair will reach the peak of its oversold status and bears will start taking profit on short positions. On the other hand, the situation in the European Union is worse than in the United States in terms of fundamental factors. The EU economic recovery is slower than in the US, rates are unlikely to be raised next year, and several EU countries have imposed lockdowns due to the coronavirus. Meanwhile, the situation around COVID-19 is not so critical in the US. From this point of view, the euro may continue its decline. But let's be realistic: it cannot depreciate all the time when the Fed's key rate is higher than that of the ECB. Otherwise, it would always be falling. Based on this, we should wait for the moment when bears will be ready to take profit. Perhaps it has already arrived since the euro has not been depreciating in the last month but stays near its yearly lows. Otherwise, this moment will come sooner or later. Anyway, we need to wait for it and rely on technical analysis to determine the start. As we mentioned during the weekend, nothing confirms the end of the downtrend on the daily time frame.
On December 21, the volatility of EUR/USD is within 80 pips which is described as average. Today, we expect the pair to move between the levels of 1.1218 and 1.1378. A downward reversal of the Heiken-Ashi indicator will signal a new round of a downward movement in the sideways channel between 1.1230 and 1.1353.
Nearest support levels:
S1 - 1.1230
S2 - 1.1169
S3 - 1.1108
Nearest resistance levels:
R1 - 1.1292
R2 - 1.1353
R3 - 1.1414
Trading recommendations
EUR/USD stays in the sideways channel of 1.1230-1.1353. So, we can trade on a rebound from the upper or lower boundary of the channel or wait until the price consolidates below/above the moving average. However, we should keep in mind the pair is trading flat and volatility may decrease as holidays are coming.
On the chart
Linear Regression Channels help determine the current trend. If both channels have the same direction, this means that the trend is strong.
Moving average line (with 20.0-period settings, smoothed) defines the short-term trend and the direction for trading.
Murray Levels are target levels for defining price movements and corrections.
Volatility levels (red lines) are the price channels where the pair is likely to spend the next day based on the current volatility indicators.
CCI indicator: when it enters the oversold area (below -250) or the overbought area (above +250), this means that a trend reversal is approaching.