The EUR/USD currency pair maintained a new downward trend on Thursday. The price has been fixed below the moving average line and remains below it at the moment. Moreover, yesterday, the quotes adjusted to the moving average and rebounded from it, which increases the likelihood of further decline. We have already said earlier that we are now leaning towards the option with a fall. But at the same time, we also note that there is a high probability of the pair returning to the side channel of 1.1230-1.1360. The whole movement of the last few months looks very strange. First, if you look at the 4-hour timeframe, you won't immediately say that there was a flat at all. Now a weak upward trend is quite clearly visible, during which the pair rose to the level of 1.1475, which happened last week. However, this does not negate the fact that there is a side-channel. Second, there was no reason for the growth of the European currency, and there is no reason. Although this growth was technically justified, from a fundamental point of view, it should not have been. Thus, we are currently leaning towards the option of resuming the downward trend in 2021. The price should first fall to the level of 1.1230 and then overcome it. However, the way the pair has been moving in recent months suggests that the movement may be very weak, and it may take several more months to overcome the level of 1.1230. Global factors now remain on the side of the US currency, since it is the Fed that is going to pursue an aggressive monetary policy this year and possibly next. Market participants believe in this. The big players believe in this. Consequently, the US dollar may continue to be in demand.
Inflation cannot be overcome just like that, and the rate can be increased 6-7 times.
The current week is empty in terms of macroeconomic and fundamental events. There is practically nothing to pay attention to for traders. In such conditions, it remains only to consider the general fundamental background and build various hypotheses. For some time, we thought that the dollar would end its growth since those factors that pushed it up in 2021 cannot influence it positively forever. Sooner or later, the markets will work them out and the dollar's growth should stop. However, at the moment, it looks as if the markets continue to work them out. On the one hand, this is quite logical, since a few months ago we were talking about curtailing the quantitative stimulus program by mid-summer, and maybe one or two rate increases. Now, only the official position of the Fed is three or four rate hikes, and the QE program should end in March. However, in addition to these options, there are others. For example, some sources say that US President Joe Biden is in favor of raising the rate already in January, with an immediate 0.5% increase. Experts note that Joe Biden's confidence ratings are falling, not least because of the inability of the government and the Fed to curb inflation. Thus, Biden may even try to influence the Fed's decision in January. And JPMorgan CEO Jamie Dimon believes that the Fed may raise the key rate six or seven times. However, he said this without naming the exact dates during which such a serious rate increase could occur. German Deutsche Bank believes that already in 2022, the Fed will start selling off mortgage and treasury bonds that have accumulated on its balance sheet for about $ 9 trillion. Recall that this process is also a tightening of monetary policy since now excess liquidity will be withdrawn from the market. Deutsche Bank expects that the Fed's balance sheet may decrease by $ 560 billion this year, by $ 1 trillion next year, and by one and a half trillion or more in subsequent years. Thus, the major players in the foreign exchange market do not just expect a rate increase, they assume that the tightening will be much larger and faster than originally planned. Now the States need to lower inflation as soon as possible. However, falling inflation will lead to a recession in almost any case.
The volatility of the euro/dollar currency pair as of January 21 is 65 points and is characterized as "average". Thus, we expect the pair to move today between the levels of 1.1249 and 1.1379. A reversal of the Heiken Ashi indicator upwards will signal a round of corrective movement.
Nearest support levels:
S1 – 1.1322
S2 – 1.1292
S3 – 1.1261
Nearest resistance levels:
R1 – 1.1353
R2 – 1.1383
R3 – 1.1414
Trading recommendations:
The EUR/USD pair has consolidated below the moving average line and continues to move down. Thus, now you should stay in short positions with targets of 1.1292 and 1.1261, which should be kept open until the Heiken Ashi indicator turns up. Long positions should be opened no earlier than the price is fixed above the moving average line with targets of 1.1414 and 1.1444.
Explanations to the illustrations:
Linear regression channels - help 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 trading should be conducted 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.