The fundamental picture set the stage for EUR's spike yesterday.
Hi, dear colleagues!
The crucial event of the week took place yesterday. The ECB unveiled its policy statement followed by the press conference by President Christine Lagarde. The meeting's outcome boosted demand for EUR that asserted strength against the US dollar. Let's try to sort out the maze of information and find out why Lagarde's press conference took center stage among market participants. The ECB decided to leave interest rates at historic lows.
In her speech, Christine Laragde said that the EU economy is expected to slow down the pace of its recovery in Q1 2022. The ECB leader pinpointed factors to blame for soft economic growth such as disruptions in supply chains and some economic restrictions amid the Omicron outbreak. Nevertheless, the ECB policymakers anticipate that the EU economy will maintain momentum for the whole of 2022 and the labor market will continue its robust employment. Apart from that, the EU industrial output got back on track to the pre-pandemic levels. On top of that, Christine Lagarde expanded on the burning issue of high inflation.
The policymaker reckons that inflation is set to persist at high rates longer than expected, thus posing short-term risks. At the same time, the ECB President defined such risks as well-balanced. The ECB pointed out that considerable growth of energy prices is the main culprit of soaring inflation. The EU CPI accelerated to 5.1% in January year-on-year. Nevertheless, ECB policymakers believe that inflation will decline step by step throughout 2022
Speaking about the ECB's pandemic emergency purchase program (PEPP), the odds are that it will be completed next month. The regulator did not clear up the timeline for rate hikes. Apparently, the interest rates will remain at the current level until inflation gets lower. Interestingly, Christine Lagarde did not rule out at least one rate hike in 2022 but did not give any guarantees. Everything will depend on macroeconomic data with the focus on consumer inflation. To sum up, the ECB revealed a substantially hawkish shift. This triggered a spike of EUR/USD. Such a market response is confirmed by the technical picture on the most traded currency pair.
Daily
Yesterday's spike was prefaced by a reversal candlestick pattern Morning star. According to the daily chart, EUR/USD rebounded from support at 1.1273 that was breached by a false breakout. The price also rebounded from the red Tenkan line of Ishimoku and the lower border of its cloud. As a result, the currency pair skyrocketed and closed yesterday a bit higher than the upper border of the cloud. This is a big success of the euro bulls. So, we can predict a further uptrend of EUR/USD. Nevertheless, we should not forget about another significant report that is due today. The US Labor Department is to release the nonfarm payrolls for January. Analysts expect a flat unemployment rate at 3.9%. The US public and private sectors could have added just 150K jobs, excluding farm employment. Besides, average hourly earnings are projected to rise by 0.5%.
By and large, the forecasts are modest. Earlier this week, the ADP payroll processor published a dismal report that logged contraction in employment last month. Hence, the official data might be worse than expected. If it happens in practice, EUR/USD will continue its advance with the first target in the area of 1.1500-1.1520. I suggest that if the pair closes above 1.1500 this trading week, it will signal a trend reversal of EUR/USD. Alternatively, if the pair re-enters the Ishimoku cloud and finishes trading today with a bearish candlestick to close below the 89-exponential moving average, the trading instrument will come under selling pressure again. From my viewpoint, the bullish scenario is more feasible. Nevertheless, we should wait for the nonfarm payrolls and a market response that will clear up trading sentiment on EUR/USD.
I would refrain from giving any trading recommendation on the final day of the week in anticipation of the keynote report on the US labor market.
Good luck!