The EUR/USD currency pair traded less volatile on Thursday than on Wednesday but was very indicative. The movements require detailed analysis. So, on Wednesday afternoon, the euro rose by 160 points. Then, at night, a downward correction of 85 points (50%) followed, and the next day, new growth of the pair began in the morning. Thus, the first thing that can be said is that European traders also considered it necessary to work out a report on inflation in the United States, which for the first time in a long time signaled a slowdown in price growth. The second thing that cannot be kept silent is that traders failed to break through the maximum on Wednesday. The third thing that should be recalled is that the fundamental background for the euro and the dollar, in principle, remains the same. Yesterday, we suggested that after the July inflation report in the US, the market mood may change dramatically since the essence of this report allows us to expect the beginning of an easing of the Fed's aggressive monetary approach. We need to be prepared for the fact that the strengthening of the US dollar, which lasted more than a year and a half, will end there. However, the situation can be viewed from a different angle.
First, even easing the Fed's aggressive attitude does not mean that the Fed will not tighten monetary policy now. It means that markets and economic mechanisms will continue to work. If the ECB rate remains at 0.5% and the Fed rate rises to 4% by the end of 2022, will this be a reason for the growth of the euro currency just because the Fed slows down the pace of monetary policy tightening? From our point of view, no. The dollar should continue to rise in price against the euro. It can decline only when the Fed completes the rate hike cycle or when the ECB comes out of hibernation and starts raising its rates aggressively. But we remind you that the market can always interpret everything that happens in its way. It is necessary to monitor the development of the situation and not forget about the "technique."
The ECB still does not look like a bank that can support its currency.
But whether the ECB will aggressively raise the key rate is a big question. Recall that the ECB, like other central banks, fears a recession, and its main goal (unlike the BA and the Fed) did not call the fight against inflation. Yes, Christine Lagarde also understands the seriousness of the problem of rising prices, but she is not ready to raise the rate headlong and drive the European economy into recession to achieve price stability. Remember, Jerome Powell said that the constant companion of the recession should be the growth of unemployment and the deterioration of the labor market? So in the European Union, the unemployment rate is twice as high as in the United States. Thus, for the EU, the threat of a recession is perhaps even more urgent than for the States, where the last two quarters have been "negative" in economic growth.
At the same time, it became known that the ECB is trying to stimulate countries whose economies have been experiencing problems in recent years and are most severely affected by the coronavirus pandemic. First, we are talking about Spain, Italy, and Greece. The regulator has invested 17 billion euros in treasury bonds of these countries. At the same time, the ECB actively sold bonds of France, Germany, and the Netherlands (their volume decreased by 18 billion euros). The regulator explained its actions as the need to support weaker economies during rising key rates and financial instability. This means, at a minimum, that the European Union is full of problematic states that regularly need a "lifeline" from the ECB. As we remember, the ECB needs to consider the interests of as many as 27 countries, which is why it is in no hurry to raise the key rate since not everyone can withstand the tightening of monetary policy. Now it is the European Union that is most similar to the Titanic, where to do some manipulation, it takes a lot of time to get the team to the engine room and change course by at least a couple of degrees. And in such conditions, should the euro currency show growth only based on softening the aggressive approach of the Fed? By the way, there is no evidence of softening this approach yet. This is just a hypothesis of traders.
The average volatility of the euro/dollar currency pair over the last 5 trading days as of August 12 is 98 points and is characterized as "high." Thus, we expect the pair to move today between 1.0241 and 1.0435. The reversal of the Heiken Ashi indicator downwards signals a round of downward movement.
Nearest support levels:
S1 – 1.0315
S2 – 1.0254
S3 – 1.0193
Nearest resistance levels:
R1 – 1.0376
R2 – 1.0437
R3 – 1.0498
Trading Recommendations:
The EUR/USD pair is now trying to resume the upward trend. Thus, it is now possible to stay in long positions with targets of 1.0376 and 1.0437 until the Heiken Ashi indicator turns down. It will be possible to consider short positions again after the price is fixed below the moving average with targets of 1.0193 and 1.0132.
Explanations of the illustrations:
Linear regression channels – help to determine the current trend. If both are directed in the same direction, then the trend is strong.
Moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction in which trading should be conducted now.
Murray levels are target levels for movements and corrections.
Volatility levels (red lines) are the likely price channel in which the pair will spend the next day, based on current volatility indicators.
The 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.