The EUR/USD currency pair resumed its growth quite calmly on Tuesday. We have already said in previous articles that it is too early to make an unambiguous conclusion about the completion of the formation of a long-term downward trend. This trend has been forming for too long to break in one week. Recall that we have a certain "bifurcation point" - 1,0369. This level is the last local maximum. If it is updated, the chances of forming a new upward trend will increase dramatically. If not, then the entire current segment of the growth of the euro currency will be recognized as another "weak" correction, as we recall that during the entire downward trend, the pair showed corrections of a maximum of 400 points. And Tuesday eloquently showed us that the level of 1.0369 is unattainable for the pair, and it's too early to put an end to the dollar. The market only had enough understanding that inflation in the US in August fell slightly less than predicted to collapse the pair by almost 200 points. What else is there to talk about?
The morning growth of the euro currency can also not be called logical from a macroeconomic point of view. In the morning, an inflation report for August was published in Germany, which showed a new acceleration to 7.9%, fully corresponding to experts' forecasts. On the one hand, such a report could cause a new strengthening of the euro currency since any increase in inflation is at least a little. Still, it increases the likelihood of further tightening the ECB's monetary policy. And Germany is the "locomotive" of the European economy. The indicators of this country cannot be ignored.
On the other hand, inflation in Germany is just one of the lowest among the countries in the European Union. The acceleration of the consumer price index in the Bundestag is not something critical. European inflation is higher. Therefore, the growth of the euro currency does not quite correlate with this report.
The head of the Bundesbank urges the ECB to continue raising the rate.
But the head of the Central Bank of Germany, Joachim Nagel, said this week that the European Central Bank needs to continue tightening monetary policy. However, Nagel remarked: "if the inflation picture continues to remain as it is now or worse." From our point of view, the inflation picture will remain the same as it is now or worse. Most likely, this is also understood in the European Union. Thus, several leading central banks in the EU are already calling for a continued increase in the rate. Nagel also drew attention to the fact that, with the current rate of price growth in December, inflation may exceed 10%. Joachim noted that he expects a slowdown in price growth in 2023, but inflation will remain at a high level – above 6%. He also notes that confidence in the European currency has fallen greatly in recent months and needs to be restored. This can be done again by raising the key rate.
As for the recession, Nagel did not comment on this topic in any way, although the ECB can hardly ignore it as easily as the head of the Bundesbank. Suppose everything is fine with Germany's economy, and the country's central bank is ready to raise rates. In that case, the European Union is full of weaker economies, for which an increase in rates may mean a recession and a serious collapse of the economy. And then the European Commission will have to again throw "lifebuoys" to such countries from the European budget, which will be replenished at the expense of Germany and other "pillars" of the European economy. However, in general, we agree with Nagel and believe that if the ECB has raised the rate by 1.25% twice, it will continue to do so in the future while maintaining the current pace. In principle, Christine Lagarde almost openly stated this last week after the meeting. It intends to raise the rate at all subsequent meetings in 2022 to catch up with the Fed. For the euro currency, such news is like manna from heaven. We have been saying that the divergence between the ECB and Fed rates is pushing the euro down for a long time. Now this divergence can be leveled, which means that the euro currency can get a couple of trumps on its hands.
The average volatility of the euro/dollar currency pair over the last five trading days as of September 14 is 137 points and is characterized as "high." Thus, we expect the pair to move today between 0.9881 and 1.0155. A reversal of the Heiken Ashi indicator back to the top will signal a possible resumption of the upward movement.
Nearest support levels:
S1 – 1.0010
S2 – 0.9949
S3 – 0.9888
Nearest resistance levels:
R1 – 1.0071
R2 – 1.0132
R3 – 1.0193
Trading Recommendations:
The EUR/USD pair may have started a new uptrend, but it may have already ended it. Now we should consider sell orders if the price is fixed below the moving average line with targets of 0.9949 and 0.9888. Buy orders should be opened if the pair bounces off the moving average, with targets of 1.0132 and 1.0155.
Explanations of the illustrations:
Linear regression channels – help determine the current trend. The trend is strong if both are directed in the same direction.
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.