The EUR/USD currency pair showed only one thing on Wednesday - a complete unwillingness to move. Although the event calendar contained several interesting reports, the market needed to see fit to react to them. Recall that just a day earlier, the European currency showed a fairly strong decline, but on Wednesday, it stopped, and the pair started to incline towards growth.
Therefore, whether the euro has transitioned to forming a new downward trend is still being determined. We still expect a strong and prolonged decline in the euro because we do not see any growth factors. The market had long believed in the Federal Reserve's quick transition to monetary policy easing. Still, the latest information from the inner circles of the American regulator leads to only one conclusion: the Fed is quick to lower the key rate.
This is logical. One should ask: Why should the Federal Reserve rush to lower rates? The U.S. economy is doing very well despite the high-interest rates. GDP grew by almost 5% in the third quarter. The unemployment rate remains low. The labor market continues to create jobs steadily. Of course, the situation is gradually deteriorating because high rates "cool down" the economy. Still, there is a huge difference between "bad" in the U.S. and "bad" in the European Union.
In Europe, the economy has not been growing for a year and a half, and interest rates are much lower than in the U.S. Inflation has slowed to about 3%. Still, ECB representatives are in no hurry to start the monetary policy easing cycle. In the United States, the Fed representatives also do not want to rush and have the opportunity not to rush.
There will be no scenario where the Fed starts easing in March, and the ECB starts much later. Therefore, the European currency has no advantage over the dollar.
Yesterday, one of the monetary committee members, Christopher Waller, said there was no need to rush with rate cuts. Earlier, several of his colleagues voiced the same thesis. This week, several ECB representatives also said the same thing. Christine Lagarde stated that rates could start to fall "by the summer." In other words, representatives of both central banks are considering a scenario with the first-rate cut around May. The time difference between the start of easing cycles in the EU and the U.S. may be minimal or nonexistent.
Meanwhile, the market is openly confused about its expectations. Inflation, speeches by high-ranking officials, and excessively high expectations only add confusion to the market. There is no clear answer to the question of when a particular bank will start lowering rates. Nevertheless, market participants try to guess the answer to this question and make trading decisions based on their assumptions.
Naturally, the main instruments show movements that are difficult to explain logically. The European currency is inclined to decline (which is logical), but the pound has been stable for about a month. The Bank of England's stance may be tougher than that of the ECB and the Fed, but we still expect the first rate cut from the British regulator by the summer of 2024.
For now, we expect a further decline in the euro. The price is below the moving average. Today, a bounce from the moving average line may provoke a new wave of decline. The CCI indicator entered oversold territory, but we do not believe an upward trend will resume now.
The average volatility of the euro/dollar currency pair for the past five trading days as of January 18th is 57 points and is characterized as "average." Thus, we expect the pair to move between the levels of 1.0841 and 1.0955 on Thursday. A reversal of the Heiken Ashi indicator back down will indicate a possible resumption of the downtrend.
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 remains below the moving average line, so a downward movement can resume any moment. Overbought conditions of the CCI indicator have indicated an excessively high cost of the euro for a long time, so we continue to expect a decline in the pair's quotes. We consider it reasonable to consider short positions with targets at 1.0864 and 1.0841 in case of a price rebound from the moving average. Long positions will be considered after the price is fixed above the moving average, with targets at 1.0955 and 1.0986.
Explanations for the illustrations:
Linear regression channels - help determine the current trend. The trend is currently strong if both are directed in the same direction.
The moving average line (settings 20.0, smoothed) - determines the short-term trend and the direction in which trading should be conducted now.
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 territory (below -250) or the overbought territory (above +250) indicates that a trend reversal in the opposite direction is approaching.