On Tuesday, the EUR/USD currency pair continued to trade with low volatility and an upward bias. The pair failed to establish itself below the moving average line, so the upward trend is maintained. Despite not seeing any grounds for the euro's growth (especially considering it has already risen by 550 points in the last two months), demand for it remains strong, ensuring its strengthening.
For example, why did the euro rise on Monday without macroeconomic and fundamental events during the day? Suppose this movement can be attributed to a correction. On Tuesday, what were the reasons for the rise? The only significant report of the day was the inflation in the EU in the second estimate for November. As expected, the first estimate did not differ from the second estimate. The Consumer Price Index fell to 2.4%, almost completely negating any further tightening of the ECB's monetary policy. However, even the European regulator's monetary committee members do not expect a new rate hike. If people like Christine Lagarde or Francois Villeroy de Galhau talk about the lack of a need to raise rates, what can the market expect?
It is challenging to imagine a situation where Lagarde opposes a rate hike, and the market still believes in further tightening. The problem then lies with the Fed and its actions in 2024. Jerome Powell stated last week that the central bank would lower the rate several times next year. But the ECB will also lower it several times next year, as openly stated yesterday by the head of the Bank of France, Francois Villeroy de Galhau. In other words, both central banks will lower the rate, and the ECB has many more reasons to do so quickly and forcefully than the Fed, which continues to tolerate 3.1% inflation, but the euro is still growing. This is illogical and inconsistent.
What did de Galhau report?
As mentioned earlier, the head of the Bank of France clarified on Tuesday that the European regulator will not stand aside in 2024. The current interest rate level is unnecessary with constantly decreasing inflation, already at 2.4%, only 0.4% above the target level. Even if inflation accelerates slightly in winter, it will not be extraordinary, as inflation cannot constantly move in only one direction.
Francois Villeroy de Galhau said yesterday that inflation will reach a stable 2% no later than 2025. He emphasized that this is not a forecast but a promise. "Inflation has been a problem for the French and the entire European Union for a long time, but it is slowing down as expected. We had to raise key rates to cope with the sharp price rise. The rate hike is already over, but before we move on to the reduction, which will start next year, some time must pass to consolidate the achieved result," de Galhau believes.
Thus, we can draw the same conclusions as before. If the market reacts so painfully to Powell's words about rate cuts in 2024, why doesn't it react as painfully to de Galhau's statements, who is not the last member of the ECB's monetary committee? Or is it necessary for Christine Lagarde specifically to voice such a phrase? Both central banks will ease monetary policy, so there are no grounds for the growth of the euro.
The average volatility of the euro/dollar currency pair for the last five trading days as of December 20 is 98 points and is characterized as "high." Thus, we expect movement between the levels of 1.0878 and 1.1074 on Wednesday. A reversal of the Heiken Ashi indicator back down will indicate a new phase of corrective movement.
Nearest support levels:
S1 – 1.0864
S2 – 1.0742
S3 – 1.0620
Nearest resistance levels:
R1 – 1.0986
R2 – 1.1108
R3 – 1.1230
Trading recommendations:
The EUR/USD pair remains above the moving average line, but we still see no reasons for further growth. The price has already reached the psychological level of $1.10, and if the third attempt to break through is successful, the upward trend will continue, and the euro will continue to rise. The overbought condition of the CCI indicator still indicates a more likely decline. Short positions can be opened when fixed below the moving average with a target of 1.0742.
Explanations for the illustrations:
Linear regression channels - help determine the current trend. If both are directed in the same direction, the trend is strong.
Moving Average Line (settings 20.0, smoothed) - determines the short-term trend and direction to trade now.
Murray Levels - target levels for movements and corrections.
Volatility levels (red lines) - the probable price channel in which the pair will spend the next day, based on current volatility indicators.
CCI indicator - its entry into oversold territory (below -250) or overbought territory (above +250) indicates that a trend reversal is approaching in the opposite direction.