The EUR/USD currency pair traded very calmly on Monday. Throughout the day, there were no scheduled important or even secondary events. In addition, it was a public holiday in the United States - Presidents' Day. Therefore, strong movements were unlikely under any circumstances.
Since the fundamentals and macroeconomics were empty, the analysis must focus on the overall background or the general technical picture. However, the former and the latter have stayed the same for a long time. The European currency still looks unreasonably expensive, and the dollar is undervalued. Recall that the main factor in the growth of the European currency at the end of last year can be considered too high market expectations for Fed rates. To be more precise, they are too low.
In other words, the market expected five or six rounds of rate cuts in 2024, but in reality it can wait for two, as Rafael Bostic said last week. The market expected that the monetary policy easing cycle would begin in March, and may see it begin in June. And if earlier traders actively sold the dollar based on their "dovish" expectations, at this time there simply cannot be any "dovish" expectations, since Fed officials openly declare that there will be no easing in March, and there may be much fewer rounds of rate cuts than the market expects.
And if earlier we had a lot of questions about the validity of the dollar's fall, now we believe that almost all factors support the growth of the US currency. Before the decline, the EUR/USD pair entered overbought territory four times (according to the CCI indicator). In other words, it was initially unreasonably expensive, implying a decline. Then, the main supporting factor for the euro was neutralized.
So, if we were expecting only a decline from the EUR/USD pair before, we are even more anticipating it. It should be noted that the technical picture also fully supports further pair decline. The price settled above the moving average in the 4-hour timeframe, but the previous four similar settlements did not lead to the pair's growth. The CCI indicator entered the overbought zone last week, but such a signal in a downtrend indicates only a correction. We have already seen the correction. Of course, it may be stronger, but we still do not see any basis for the market to buy the euro.
It is worth noting that the German Central Bank published a monthly report on Monday, explicitly stating that the German economy is in a recession. Moreover, the document noted no recovery, and the GDP decline will likely continue. Thus, the European economy, which has been balancing on the edge for over a year, may also start to experience a recession. What other reasons do we need to refrain from buying the European currency? The German economy is the locomotive of the entire European Union and is in a recession. Meanwhile, the ECB may start lowering rates as early as this summer, although the market expected later dates.
The average volatility of the euro/dollar currency pair for the last five trading days as of February 20 is 57 points and is characterized as "average." Thus, we expect the pair to move between the levels of 1.0719 and 1.0833 on Tuesday. Both linear regression channels are directed downward, so the downtrend persists. The oversold condition of the CCI indicator allows only a small upward correction for now.
Nearest support levels:
S1 – 1.0742
S2 – 1.0681
S3 – 1.0620
Nearest resistance levels:
R1 – 1.0803
R2 – 1.0864
R3 – 1.0925
Trading recommendations:
The EUR/USD pair remains above the moving average line, but we continue to look toward short positions with targets at 1.0716 and 1.0681, as the growth can be at most corrective. The decline of the European currency is stable but slow, with frequent corrections. We see no reason for a global rise in the euro. Long positions can now be considered with targets at 1.0833 and 1.0864, as the price has surpassed the moving average. Still, the illustration shows that the last four settlements above the moving average did not lead to the pair's growth. Therefore, caution is needed with purchases.
Explanations for the illustrations:
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 direction for trading.
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 zone (below -250) or overbought zone (above +250) indicates an upcoming trend reversal in the opposite direction.