FX.co ★ Wave analysis of EUR/USD on February 9. Inflation accelerates again? New prospects for EUR?

Recently, the wave layout on the 4-hour chart remains virtually unchanged for EUR/USD. It's great because we are well aware of further developments. The upward section looks like a clear-cut corrective move, though its size suits better an impulsive move. We've got an a-b-c-d-e structure where wave e has a more complicated shape than the first four waves. If the ongoing wave layout is true, this pattern has been already built with wave e much lengthier than all previous waves. We expect at least three more downward waves. So, I still anticipate a strong decline in the instrument.

In the first weeks of 2023, demand for the euro was steadily buoyant. The currency pair retreated only once from earlier peaks over this period. However, in early February, the US dollar managed to shrug off selling pressure. The ongoing retreat from earlier peaks could be considered a beginning of a new downward section and a broader bearish trend. Personally, I've been expecting it for long. I reckon this time, the news environment and market sentiment won't prevent a downward wave layout from progressing.

Powell's speech agitates market

EUR/USD slipped by 20 basis pips on Wednesday. The pair was making muted moves because the news environment was sparse. This week, the speech of Jerome Powell was the only high-impact event. Still, the market did not grasp the point in the Fed Chairman's speech. That's why the market response was lukewarm. Today, the market will get to know the report which is commonly overshadowed by more significant data. The CPI for Germany is just an inflation report for one of the EU economies. Interestingly, last month some countries logged negative inflation dynamics, but the market didn't attach much gravity to this.

Now, the EU's powerhouse could report a new acceleration in its CPI for January. According to the consensus, the CPI is expected to rise to 9.0% on year from 8.6% in December. It could be the beginning of the end. Perhaps I'm exaggerating the situation, but the fact of rising inflation at the peak of the ECB's monetary tightening could be a bad omen. If inflation again clicks into gear in Germany, no doubt the same will follow in other EU countries. It is good news for the euro, but there is one big question. Let's assume inflation accelerates while the ECB raises its interest rates to the ultimate level. If the ECB raises interest rates two more times but inflation gets stuck at 8-10%, what will the regulator have to do? Nowadays, there is serious concern that the ECB will increase its refinancing rate in 2023 after the announced rate hikes by 50 and 25 basis points. The European regulator might end up in a gridlock. It won't be able to raise interest rates whereas inflation is still not stemmed. The Federal Reserve is not running such risks. This could support demand for the US dollar.

Conclusion

Bearing in mind the above analysis, I draw the conclusion that the upward trend section has been already completed. Thus, we can plan short positions with downward targets located at 1.0350 which corresponds to the 261.8% Fibonacci level. Nevertheless, we should not rule out the scenario of developing a more complicated upward section. However, the more realistic scenario is seen in the current chart. We have spotted the clear-cut picture which signals the beginning of a new downward trend section.

On larger time frames, the wave layout of the upward section looks lengthy, but apparently, this section is over. We've recognized five upward waves which represent an a-b-c-d-e pattern. The instrument could have already started the formation of the anticipated downward section. EUR/USD might drop another 300-400 pips.