The EUR/USD currency pair once again tested the moving average line on the 4-hour timeframe on Tuesday and began to decline quite sharply. It cannot be said that the volatility of the past day was off the charts, but compared to Friday and Monday, any value is considered high. We believe that the European currency will continue its decline. Let's briefly list the factors and reasons that could contribute to this.
First, all recent upward movement is a correction visible in the 24-hour timeframe. The preceding downward movement was more significant, so at the moment, the trend can be considered "downward," implying that the decline of the euro's quotes should resume. The downside targets range from $1.04 to $1.02, suggesting a minimum drop of 450 points from current levels.
Second, the European currency has been rising illogically in recent months. The European economy has long been showing much weaker results than the American economy. The Fed's rate is higher than the ECB's rate and is expected to remain so for a long time. Therefore, an upward correction does not surprise us, but we believe it has become excessively strong.
Third, the factor of monetary policy in 2024. A few weeks ago, the market firmly believed that the Fed would start easing monetary policy in March and then continue to lower the rate by 0.25% at all subsequent meetings, implying seven rate cuts. We have repeatedly asked ourselves: on what basis were such expectations formed? Inflation in the United States has not been falling for over half a year, the economy is doing well, and the labor market is consistently creating jobs. So why would the Fed rush to lower the rate?
However, the market ignored the inconvenience of the logical chain and continued to play out the scenario of a rapid Fed rate cut and a not-so-fast ECB rate cut. But at the end of January, just one week before the Fed's meeting, it has become clear that the probability of the first easing in January is zero, and in March, it is minimal. According to the FedWatch tool, it currently does not exceed 42%, although a couple of weeks ago, it was 80%.
Almost all of the Federal Reserve's monetary committee members spoke in January, and most warned the market against excessive expectations of a key rate cut. In other words, the Fed officials themselves stated that there is no plan to ease in March and everything will depend solely on inflation indicators. And as we have already discussed, inflation has been far from ideal for the past 6-7 months.
At the same time, Christine Lagarde announced that the ECB may start lowering the rate closer to the summer. And "closer to summer" means that the Fed and the ECB could start easing their policies almost simultaneously, something the market refused to believe just a couple of weeks ago. If both central banks start lowering the rate in parallel, who will benefit from it? Certainly not the euro, which has been rising for the past three months on opposite expectations and whose rate is lower.
Therefore, practically all the fundamental and macroeconomic backgrounds favor the dollar. Technical analysis also largely supports the American currency. The decline may not be rapid and strong, but the EUR/USD pair has never been a super-volatile instrument.
The average volatility of the EUR/USD currency pair over the last five trading days as of January 24th is 52 points and is characterized as "average." Therefore, we expect the pair to move between the levels of 1.0785 and 1.0889 on Wednesday. An upward reversal of the Heiken Ashi indicator will indicate a new upward correction phase.
Nearest support levels:
S1 - 1.0803
S2 - 1.0742
S3 - 1.0681
Nearest resistance levels:
R1 - 1.0864
R2 - 1.0925
R3 - 1.0986
Explanations for the illustrations:
Linear regression channels - help determine the current trend. If both channels point in the same direction, the trend is currently strong.
The moving average line (settings 20.0, smoothed) - determines the short-term trend and the direction in which trading should be conducted.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the likely price channel in which the pair will move over the next day based on current volatility indicators.
CCI indicator - its entry into the overbought territory (above +250) or oversold territory (below -250) indicates an impending trend reversal in the opposite direction.