The EUR/USD currency pair did not show high volatility on Monday and started a weak downward correction, as we anticipated. In principle, the market sentiment was not influenced by the planned fundamental events (we will discuss them below). And perhaps they were not supposed to. Recall that the EUR/USD pair is in a strong upward correction after its monthly decline. Corrections can vary. Those that are truly worth highlighting range from 30% to 100%. This time, the euro could have corrected by 60–70%, and there is nothing strange or surprising about that. We have mentioned many times in recent months that the euro currency is significantly overbought and is positioned too high, given the fundamental backdrop at its disposal. Therefore, we expect only one thing - a decline.
Lately, the interest rate factor has come to the forefront again. The markets received new information from the Fed and the ECB, and it unexpectedly turned out that both central banks are willing to tighten monetary policy more aggressively than was previously thought a couple of months ago. The ECB believes that the rate may continue to rise in the autumn, while the Fed has stated that the rate may increase one or two more times. However, in any case, both central banks are ready to continue tightening beyond the "planned" levels. Thus, there are no advantages for the euro currency over the dollar after it has already risen by 1550 points in the past three quarters. Furthermore, the Fed's rate is higher than the ECB's rate and will remain so because the ECB does not have the same capabilities as the US regulator. Additionally, the Eurozone economy has shown a 0.1% contraction in the last two quarters, unlike the US economy, which still exists although its growth rates are decreasing.
Not to mention the state of the labor market and unemployment. In the United States, these indicators are in good order, while unemployment in the EU stands at 6.5%. Thus, the path for the euro currency is only downward if the fundamental backdrop has any significance.
ECB Chief Economist Philipp Lane stated on Monday that a rate hike in July would be appropriate. With this statement, he certainly did not reveal anything groundbreaking. We have mentioned many times that we should expect three more rate hikes after slowing down the pace of monetary policy tightening to a minimum. Therefore, the rate will rise to 4.25%. This is not news or an intensification of the regulator's "hawkish" stance, so the market did not react to this statement. Similarly, the statements made by Luis de Guindos and Isabel Schnabel should have been addressed.
Mr. Lane stated that inflation in the Eurozone would fall to 2% in the coming years, which speaks to the regulator's need for more urgency. In other words, he is not striving, like the Fed, to return inflation to 2% in the shortest possible time (they even started raising rates six months later). Indirectly, this indicates that the rate will only rise for a short time. And if so, it will rise to 4.25% or a maximum of 4.5%. In other words, one or two more times. That's how many times the Fed's rate can rise this year.
And if inflation in the EU continues to decrease at normal rates, it will not make sense to continue tightening monetary policy, driving its economy into a recession. After all, what is the ECB's calculation? Even a few quarters of negative growth are fine. The rate will decrease when inflation approaches 2%, and the economy will accelerate. However, the higher the rate rises in 2023, the stronger the economy will fall. It may take a long time to solve the recession problem. The conclusion is that the euro currency has no grounds for further growth against the US dollar.
The average volatility of the euro/dollar currency pair for the past five trading days, as of June 20th, is 77 points and is characterized as "average." Therefore, we expect the pair to move between the levels of 1.0843 and 1.0977 on Tuesday. A reversal of the Heiken Ashi indicator back upwards will indicate a resumption of the upward movement.
Nearest support levels:
S1 - 1.0925
S2 - 1.0864
S3 - 1.0803
Nearest resistance levels:
R1 - 1.0986
R2 - 1.1047
R3 - 1.1108
Trading recommendations:
The EUR/USD pair continues to stay above the moving average line. Long positions should be considered with targets at 1.0977 and 1.0986 in case the Heiken Ashi indicator reverses upwards. Short positions will become relevant again only after the price firmly falls below the moving average line, with targets at 1.0803 and 1.0742.
Explanation of the illustrations:
Linear regression channels - help determine the current trend. If both point in the same direction, the trend is currently strong.
Moving average line (settings 20.0, smoothed) - determines the short-term trend and direction for trading.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the probable price channel in which the pair will move the next day based on current volatility indicators.
CCI indicator - its entry into the oversold region (below -250) or overbought region (above +250) indicates an approaching trend reversal in the opposite direction.