As we stated over the weekend, the EUR/USD currency pair continues to move in an extremely calm manner. However, Tuesday night's events are far more intriguing. We disregarded this occurrence in the last article; now we are filling in the blanks. Jerome Powell gave a speech at the Economic Club of Washington that was very average. Speeches made in Congress or following a Fed meeting cannot be compared to an event of this magnitude. The market, however, took it quite seriously. We will discuss Powell's exact remarks in more detail later, but for the time being, let's just observe that the response was as if the Fed chairman had made a very significant statement. Actually, no. Powell, like other Fed officials and representatives from other central banks, as we have already stated numerous times, simply cannot surprise traders and investors every week. The direction of monetary policy changes very gradually. As a result, we very rarely hear something new and unheard of, not even following each central bank conference. However, traders initially devalued the dollar by 100 points, promptly put it back in its proper position, and then slowly increased the pair's value by another 70–80 points.
It is important to notice right away that the current situation calls for an upward correction. The pair had been descending for four days in a row, so a slight increase was required. Technically speaking, everything works as rationally as it can. Fundamentally speaking, the euro should keep declining but there should also be a respite. Therefore, we predict that towards the end of the week, the price may attempt to align with the moving average line before the fall starts again. On the 24-hour TF, the pair is currently quite near the crucial line, which has risen above the price. This is a risky time because, if we look at the last section of the line's horizontal movement, the price has not yet been able to pass it. The upward trend is still active.
Therefore, Jerome Powell noted in Washington that the labor market and employment levels are in excellent condition and added that, if this trend continues, the Fed rate may increase more than is now anticipated. We've already mentioned that the rate needs to be increased above 5.25% to successfully combat excessive inflation. Regarding the Bank of England or the ECB, we made the same statement. Although it is obvious that central banks fear a recession, there is only one option: either combat inflation or fight the recession. By the way, James Bullard and other "hawks" on the monetary committee share our viewpoint and think that further rate increases are required. It will be interesting to see from the minutes of the most recent Fed meeting how many committee members voted "against" tightening by 0.5% and which voted "for" it. But why did the dollar decline in the end if the market responded so strongly to a potential rate increase of 6%? Technically speaking, as was already established, the pair's growth is justified; yet, it does not correspond with the main points of Powell's speech.
We think that the market only found an excuse to fix a portion of the profit on short positions and barely even understood what Powell was trying to say. A more significant rate increase has not yet been discussed. Jerome just clarified the available possibilities. He implied that the consumer price index will not fall by 0.5-0.6% every month by pointing out that the road to getting inflation back to 2% would be long and tough. Since the cost of gas and oil has reached multi-month lows, inflation may decline even further. However, as many experts anticipate, prices for non-energy resources may start to increase, and after that, inflation may pick up speed once more. Powell thinks that 2% inflation shouldn't be anticipated before 2024. We think it might take longer to reach the target level.
As of February 9, the euro/dollar currency pair's average volatility over the previous five trading days was 103 points, which is considered to be "high." So, on Thursday, we anticipate the pair to move between 1.0611 and 1.0817. A new round of upward correction will be signaled by the Heiken Ashi indicator turning back to the top.
Nearest levels of support
S1 – 1.0620
S2 – 1.0498
S3 – 1.0376
Nearest levels of resistance
R1 – 1.0742
R2 – 1.0864
R3 – 1.0986
Trading Suggestions:
After a short upward retracement, the EUR/USD pair is attempting to resume its downward movement. Until the Heiken Ashi indication turns up, you can continue holding new short positions with targets of 1.0611 and 1.0620. After the price is fixed back above the moving average line, long positions can be initiated with a target of 1.0986.
Explanations for the illustrations:
Channels for linear regression - allow us to identify the present trend. The trend is now strong if they are both moving in the same direction.
The short-term trend and the direction in which you should trade at this time are determined by the moving average line (settings 20.0, smoothed).
Murray levels serve as the starting point for adjustments and movements.
Based on current volatility indicators, volatility levels (red lines) represent the expected price channel in which the pair will trade the following day.
A trend reversal in the opposite direction is imminent when the CCI indicator crosses into the overbought (above +250) or oversold (below -250) zones.