The EUR/USD currency pair attempted to begin a pullback again on Friday. This time, it reached the moving average line, which is virtually a feat given the current market conditions. Thus, the price has moved as much as 130 points away from the 20-year lows recorded last week. Consider for yourself if this qualifies as a correction. We remind you that no instrument can travel in only one direction continuously.
Nonetheless, a protracted downturn (or expansion) is feasible, as we are currently experiencing. Does it need repeating that the euro's fundamental and geopolitical environments remain quite negative? Consequently, the circumstances have not changed significantly for a very long time. First, the macroeconomic backdrop on Friday was quite weak, and second, it was neutral. All three data points provided in the United States failed to elicit any reaction from traders, so it is difficult to conclude that the euro has risen and the dollar has fallen due to the lackluster numbers. It isn't easy to correlate statistics with market developments in the current environment.
Remember that the information originating from the European Union is not so weak. Particularly in comparison to American ones. The US labor market is extremely robust, and unemployment is substantially lower. However, American growth rates are already negative (and in the EU - positive). In the EU and the United States, inflation is rising at roughly the same rate. The fact that Europe is significantly closer to the center of the conflict in Ukraine than the United States remains an issue. Europe may face a gas or energy crisis, and its economy may be severely impacted by the sanctions it has imposed on Russia. This, from our perspective, is the primary reason for the euro's weakening. It is hard to ignore the distinction between the Fed and the ECB's monetary policies. These two elements continue to exert pressure on euro/dollar currency combinations.
Does it make sense to wait for a favorable market reaction to the ECB meeting?
There will be at least two significant events in the European Union next week that could significantly impact the pair's movement. The June inflation report will be released on Tuesday. From our perspective, everything is straightforward here. Forecasts indicate that the indicator will accelerate from 8.1% y/y to 8.6% y/y. If inflation is rising in the United States despite the rate increase to 1.75 percent, it should rise considerably more in the European Union. Therefore, the forecast will likely come true. A new acceleration in the consumer price index could strengthen the euro as the probability of the central bank tightening monetary policy increases. Not in the case of the ECB, however. A month ago, the European authorities announced the first rate rise in a very long time. Thus, the market might have already calculated this information ten times.
Moreover, nonetheless, we are discussing a 0.25 percent raise. In addition, the Fed may hike rates by 0.75 percent for a second consecutive week next week. And perhaps by one percent. Consequently, we believe the inflation figure can only prompt a local appreciation of the euro.
Regarding the ECB meeting itself, everything is straightforward. It will conclude on Thursday, and experts are currently discussing a 0.25-percentage-point increase in the key rate, the deposit rate, and the margin rate. As a result, the deposit rate will continue to be negative. This means that when you bring cash to the bank to deposit it, you must pay the bank a fee, not the other way around. This is one of the methods for stimulating the economy, so we are not even discussing tightening in the traditional sense. This is known as the dilution of stimulation measures. Thus, the result is the same: the European currency may appreciate locally. It may even initiate a physical correction. However, the situation is expected to remain unchanged over the medium term. It is improbable that the market has waited six months for the first ECB rate hike to abandon US dollar purchases. In the coming weeks, we expect the pair to target the range between 0.95 and 0.96.
As of July 18, the average volatility of the euro/dollar currency pair for the previous five trading days was 110 points, which is considered "high." Thus, we anticipate the pair will trade between 0.9969 and 1.0189 today. The downward reversal of the Heiken Ashi indicator suggests a likely continuation of the downturn.
Nearest support levels:
S1 – 1.0010
S2 – 0.9888
S3 – 0.9766
Nearest resistance levels:
R1 – 1.0132
R2 – 1.0254
R3 – 1.0376
Investment Recommendations:
The EUR/USD currency pair has begun a new correction phase. Consequently, we should now consider additional short positions with targets of 0.9969 and 0.9888 if the Heiken Ashi indicator reverses to the downside. When the pair is fixed above the moving average with goals of 1.0189 and 1.0254, purchases become relevant.
Explanations for the figures:
Channels of linear regression – aid in determining the present trend. If both are moving in the same direction, the trend is now strong.
The moving average line (settings 20.0, smoothed) identifies the short-term trend and the current trading direction.
Murray levels serve as movement and correction targets.
Volatility levels (red lines) represent the expected price channel the pair will trade within over the next trading day, based on the current volatility indicators.
The CCI indicator – its entry into the oversold area (below -250) or the overbought area (above +250) indicates that a trend reversal is imminent.