The currency pair EUR/USD resumed its decline on Tuesday, following the existing downward trend. However, a sharp rise occurred on Wednesday. Interestingly, macroeconomic or fundamental events triggered neither the drop on Tuesday nor the rise on Wednesday. On Tuesday, there was no significant information available to traders at all. On Wednesday, the European Union released business activity indices for the services and manufacturing sectors, which can only be loosely described as positive.
Let's briefly analyze them, as traders may need to catch up on macroeconomic statistics. The business activity index in the services sector fell from 48.8 to 48.4, while the market expected an increase to 49. Negative? Yes, negative. The business activity index in the manufacturing sector increased from 44.4 to 46.6, with a forecast of 44.8. Positive? Yes, positive. This means one report was positive, and the other negative for the European currency. Perhaps the market considered the manufacturing sector more important, but remember that both indices remain below the 50.0 mark, which is considered negative. The level of 50.0 is the same as 0 in other indicators. Anything below it is considered a negative value.
So, based on what, did the European currency continue to rise after these publications? Based on the same factors that caused it to fall for days. Based on their view of what is happening in the European and American economies. We have repeatedly mentioned that the US economy is much stronger than the EU economy, and the ECB and the Fed may begin lowering rates at about the same time. The euro has been rising for about three months, which is corrective. So, why should the euro continue to rise?
We believe there is no reason. However, the ECB meeting results will be announced today, so the market may expect certain statements from Christine Lagarde. We intentionally say "statements" and not "decisions" because no important decisions are expected. The interest rate will remain unchanged with a 100% probability; we can only expect some adjustments to the quantitative tightening program, which involves selling bonds from the central bank's balance sheet to withdraw excess money from the economy. This is also interesting, but everyone is concerned about interest rates. And since interest rates will not change, the market will focus on Christine Lagarde's speech.
What can Christine Lagarde tell us that is new if she already hinted at the first monetary policy easing "closer to summer" a week ago? We believe she can only reiterate what was said last week. The market has already realized the incorrect expectations regarding ECB and Fed rates, and now it just needs time. Since we expect only declines in the European currency, it is crucial that Christine Lagarde's rhetoric does not shift towards a more "hawkish" stance and that inflation in the European Union does not start to rise sharply.
If this does not happen, the euro will continue systematically sliding downward. Within the last phase of the upward movement, the euro gained 670 points in 3 months. It has been falling for almost a month and has lost about 250 points during this time. Therefore, the pace of the downward movement is normal. The EUR/USD pair has never been a highly volatile instrument, so the current rate of movement to the south is quite normal. After the ECB meeting, the euro may even correct upward before starting a new downward movement phase. Central bank meetings are almost always unpredictable.
The average volatility of the EUR/USD currency pair for the last five trading days as of January 25th is 60 points and is characterized as "average." Thus, we expect movement in the pair between the levels of 1.0845 and 1.0965 on Thursday. A downward reversal of the Heiken Ashi indicator will indicate an attempt to resume the downward trend.
Key support levels:
S1 - 1.0864
S2 - 1.0803
S3 - 1.0742
Key resistance levels:
R1 - 1.0925
R2 - 1.0986
R3 - 1.1047
Explanations for the illustrations:
Linear regression channels - help determine the current trend. If both point in the same direction, the trend is strong right now.
The moving average line (settings 20.0, smoothed) - determines the short-term trend and direction for current trading.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the probable price channel in which the pair will move over the next day, based on current volatility indicators.
CCI indicator - its entry into the oversold area (below -250) or overbought area (above +250) indicates an upcoming trend reversal in the opposite direction.