Good afternoon, dear traders! The EUR/USD pair performed a downward reversal on Thursday. It dropped below the 1.0315 level. The euro may even decline to the level of 1.0196, namely the opening level of the week before the release of the US inflation report. This week, CPI data largely set market trends. It is quite predictable given that the economic calendar did not contain any other crucial reports. On Wednesday, traders increased long positions on the euro as they were anticipating a shift to a dovish stance by the Fed after positive inflation data. However, on Thursday and Friday, they had to revise their strategies. Let's discuss it in detail. Analysts stress that a small decline in inflation may lead to a possible slowdown in the tightening cycle. It is important to understand that the Fed is not going to shift to a dovish stance, it is likely to slow down the pace of rate hikes. On Wednesday, traders made the wrong conclusions.
The US dollar could have fallen due to a shift from the hawkish to dovish policy. Yet, it did not take place. The regulator is committed to raising rates. After thinking for two days, the bulls decided to stay away from the market for now. This is why he bears may assert strength. Over the past two days, several Fed officials confirmed that the central bank would continue to raise the interest rate until inflation reaches the 2% target. They also noted that the Fed is not going to abandon monetary tightening. Some policymakers mentioned the likelihood of hiking the rate to 4-4.5% to return inflation to the target level. Earlier, policymakers talked about the range of 3-3.5%. This is why the Fed remains hawkish. Taking into account new economic reports, a fall in the euro/dollar pair looks likely. Industrial production in the eurozone turned out to be better than expected. However, traders ignored this report.
On the 4H chart, the pair is still trading above 127.2% - 1.0173. It grew to the upper line of the downtrend corridor but failed to consolidate above it. It broke out of the sideways corridor. However, it may resume drop to the Fibonacci correction level of 161.8% - 0.9581 if the bulls are unable to push the pair above the downtrend corridor. It means that market sentiment remains bearish. There are no divergences in any indicators today.
Commitments of Traders (COT):
Last week, speculators closed 6,349 Long contracts and 9,122 Short contracts. It means that the bearish sentiment has become a little bit weaker but it has not subdued. The total number of Long contracts now amounts to 191,000 and the number of Short contracts totals 230,000. The difference is still not too big. However, the number of short positions exceeds the number of short ones. In the last few weeks, the euro has been gradually growing. Yet, recent COT reports have shown that traders are refraining from opening long positions. The euro has been unable to rise significantly in the last four weeks. Thus, traders could hardly count on a buoyant rise in the euro. For this reason, there is a high likelihood of a decline in the euro/dollar pair.
Economic calendar for US and EU:
EU – Industrial Production (09:00 UTC).
US – University of Michigan Consumer Sentiment (14:00 UTC).
On August 12, there are two important reports on the economic calendar for the eurozone and the United States. The influence of fundamental factors on market sentiment is likely to be extremely weak as these reports are of no importance to traders.
Outlook for EUR/USD and recommendations:
It is recommended to open new short positions if the pair rebounds from the upper border of the downtrend corridor on the 4H chart, aiming at 0.9581. It is better to open long positions if the pair consolidates above the downtrend corridor on the 4H chart with the prospect of a rise to 1.0638.