The EUR/USD currency pair traded quite calmly on Monday and again with a downward bias. As we said earlier, technical and fundamental factors are now in conflict with each other in some way. The growth of the European currency last week raises the most questions. On the one hand, this growth has been brewing for a long time, since there was a technical need to adjust. On the other hand, all macroeconomic statistics and the fundamental background were ignored. On the third hand, the growth factors of the US dollar that were present in the second half of 2021 could have already been worked out by the markets. However, if we put aside the last assumption, the first two judgments remain. And it turns out everything is even very beautiful. The pair went up by 150 points from its local lows, that is, it corrected. I ignored the statistics and the "foundation" in favor of the dollar, while the general fundamental background remains on the side of the dollar. And now, it turns out, the fall in the pair's quotes may resume, as it is necessary to recoup all the missed news and events of last week, as well as continue to work out the "hawkish" attitude of the Fed participants. Thus, we believe that fixing below the moving average line will complement the overall picture and significantly increase the chances of a further fall in the European currency. First, to the level of 1.1230, at which the pair has been pushing for two months, and then lower. The euro currency now has nothing to cover the trumps of the dollar. The only hope remains that the market has already played at least to some extent the factor of raising rates in 2022 and the factor of curtailing the quantitative stimulus program.
The ECB is not going to follow in the footsteps of the Bank of England and the Fed.
Against the background of a new possible weakening of the European currency, all attention is turned to the ECB. We have already said enough about the Fed, now it's time to consider the factors that guide the ECB in making decisions. The first thing that immediately catches your eye is Europe's interest in a cheap euro. Christine Lagarde and ECB Chief Economist Philip Lane have been talking about this openly all last year. In their opinion, the growth of the European currency was too strong, which is unprofitable for the Eurozone. Thus, the fact that the euro is now falling against the dollar is very good for Europe, as it increases the competitiveness of its goods in the international arena. Second, it should be remembered that the United States and the United Kingdom are separate, and the European Union is a community of countries. And in this union, the positions of each of its members should be taken into account to prevent the failure of the weakest. Yes, conditionally, Germany or France are strong states, to which an increase in the key rate may be, if not to their advantage, then at least nothing terrible. However, Italy, Spain, Greece, and some others are experiencing serious financial problems and have large debts on their hands, which have only worsened due to the pandemic. That is, an increase in the rate for these countries may slow down their economic recovery and increase the cost of borrowing. Therefore, it turns out that Europe should, first of all, think about its integrity, and not about inflation. By the way, inflation in Europe is not going through the roof, as in the United States. It is, of course, also high, but not a record. In addition, Europe is not chasing world domination. For example, its unemployment rate is much higher than in the United States, and no one pays attention to this fact. Thus, the European Union is aware of taking a soft stance on monetary policy to prevent a new collapse of same Italy. And this factor should be taken into account. Therefore, at the moment, we can conclude that the ECB will start raising rates much later than the Fed or the Bank of England and will do it as slowly as possible. And if so, then the US currency gets a fairly long-term growth factor. The only question is how long market participants will want to win back this factor. If the Fed continues to raise the rate for another 2 or 3 years, it hardly means that the dollar will grow all this time. Or does it mean?
The volatility of the euro/dollar currency pair as of January 18 is 66 points and is characterized as "average". Thus, we expect the pair to move today between the levels of 1.1340 and 1.1472. A reversal of the Heiken Ashi indicator upwards will signal a possible resumption of the upward movement.
Nearest support levels:
S1 – 1.1383
S2 – 1.1353
S3 – 1.1322
Nearest resistance levels:
R1 – 1.1414
R2 – 1.1444
R3 – 1.1475
Trading recommendations:
The EUR/USD pair maintains an upward trend. Thus, now we should consider long positions with targets of 1.1444 and 1.1472, if the pair bounces off the moving average, which should be kept open until the Heiken Ashi indicator turns down. Short positions should be opened after the price is fixed below the moving average line with targets of 1.1353 and 1.1340.
Explanations to the illustrations:
Linear regression channels - help to determine the current trend. If both are directed in the same direction, then the trend is strong now.
Moving average line (settings 20.0, smoothed) - determines the short-term trend and the direction in which you should trade now.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the likely price channel in which the pair will spend the next day, based on current volatility indicators.
CCI indicator - its entry into the oversold area (below -250) or into the overbought area (above +250) means that a trend reversal in the opposite direction is approaching.