Throughout Wednesday, the EUR/USD currency pair continued its upward movement. Recall that the price had settled above the moving average line a day earlier, which already gave a reason to assume a change in trend. Also, I remind you that we spoke over the weekend about a possible correction this week. The reason is simple: many truly important statistics will be published this week, and the market's reaction can be unpredictable. Therefore, it's impossible to predict the pair's movement or to say that the dollar should continue its growth as part of a month-and-a-half trend. As we can see, the first three significant reports in the US failed this week, which exerted strong pressure on the US currency.
What should we expect next? Over the remaining two days of the week, the pair's growth may continue, but it will largely depend on macroeconomic statistics from overseas. If Friday's Non-Farm Payrolls and unemployment data in the US turn out to be strong, and today's EU inflation indicates a significant slowdown, the rise of the European currency might end very quickly. We also remind you that we expect the pair to fall only in the medium term. Long-term growth factors for the European currency might emerge towards the end of the year. Still, they are absent now, and the dollar has been weakening for 11 consecutive months, ignoring the fundamental and macroeconomic backdrop. Thus, cautious purchases are possible now, but one should focus primarily on the south.
An interesting situation has formed on the 24-hour TF. The pair returned to the lines of Kijun-sen and Senkou Span B. Consequently, a rebound might follow today or tomorrow, in which case a drop in quotes will resume. Today and tomorrow are crucial days, as the downward trend will continue unless all reports from the States fail. In that case, we can expect a new pair rise, leading the price back above the critical line and into the Ichimoku cloud. This might either trigger the renewal of a global upward trend or push the pair into a medium-term flat, which would be better avoided.
Inflation in the EU is unlikely to support the dollar.
To our great regret, the report on the Consumer Price Index in the European Union for August, which will be released in a few hours, is unlikely to support the US currency. Yesterday in Germany, inflation was released, and it slowed down minimally. The forecast for European inflation implies its deceleration by a maximum of 0.2% to 5.1%. Thus, if inflation does not drop below 5.1% by the end of August, the market may decide that the ECB will need a stronger increase in the key rate. This week, Bundesbank President Joachim Nagel already reported that he supports further tightening and believes the time for a pause has not yet come. Therefore, a slight drop in inflation may trigger a new rise in the euro, which we do not need right now. We are counting on a neutral value of this indicator so that the market has no reason for strong purchases.
We also want to note that yesterday, the GDP report for the second quarter in the US failed in its second estimate. In our view, a rare phenomenon occurred when the second estimate significantly differed from the first and even provoked a strong market reaction (although there was also a weak ADP report yesterday). Nevertheless, the GDP grew by only 2.1% (not 2.4%), disappointing traders. However, we emphasize that 2.1% in the second quarter is much more than the 0.3% recorded in the European Union in the second quarter. Again, we face a situation where the dollar is falling on indicators much worse in the European Union. Thus, we still expect the euro currency to fall.
The average volatility of the EUR/USD currency pair over the last five trading days as of August 31 is 76 points and is characterized as "medium." Thus, we expect the pair to move between levels 1.0844 and 1.0996 on Thursday. A downward reversal of the Heiken Ashi indicator will indicate a possible resumption of the downward movement.
Nearest support levels:
S1 – 1.0864
S2 – 1.0803
S3 – 1.0742
Nearest resistance levels:
R1 – 1.0925
R2 – 1.0986
R3 – 1.1047
Trading recommendations:
The EUR/USD pair is fixed above the moving average and continues upward. It is advisable to stay in long positions with targets of 1.0986 and 1.0996 until the Heiken Ashi turns downward. However, the pair will continue to rise only with the support of the macroeconomic background. Short positions can be considered if the price consolidates below the moving average line with targets of 1.0803 and 1.0742.
Illustration explanations:
Linear regression channels - help determine the current trend. If both are directed in one direction, the trend is strong.
Moving average line (settings 20.0, smoothed) determines the short-term trend and current trade direction.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the likely price channel the pair will spend the next day, based on current volatility indicators.
CCI indicator - its entry into the oversold area (below -250) or the overbought area (above +250) means that a trend reversal is nearing in the opposite direction.