FX.co ★ EUR/USD. Overview for February 16. Klaas Knot: We may expect a strong rate hike in May.

On Wednesday, the EUR/USD currency pair started trading down again after failing to overcome the moving average line. In the last article, we issued a warning that a fix over a move of 20–30 points (particularly during the release of significant data) cannot be regarded as a change in trend. As you can see, the price once again dropped below the moving average the very next day. This could indicate the pair's entry into the flat stage or the restart of the downward trend. As there are now no justifications for the euro, we are in support of the second option. We still have trouble understanding the causes of its recent rebound growth, and it is still very overbought. We are anticipating a decline of the euro at least to the fifth level and possibly even lower. The price has been below the crucial line on the 24-hour TF for more than a week, and the current correction appears minimal in light of the prior increase. Hence, from our perspective, there aren't any grounds for the pair to grow at this time.

Moreover, keep in mind that this week's US inflation report revealed a slight reduction in the rate of price growth in January. We discussed how inflation won't continue to fall at a rapid rate indefinitely; eventually, the decline will slow down or end completely. As a result, even at the present Fed rate of 4.75%, it is far from certain that inflation will return to 2% within a year. The decision to reduce the key rate for the current year can be regarded as final. These prices won't always stay low if oil and gas prices continue to exert pressure on inflation. In 2023, several experts anticipate their rise. We only want to point out that the Fed rate may need to be raised more than most people think it will.

The ECB is getting ready to apply further monetary pressure.

According to a member of the monetary committee, Klaas Knot, the ECB may continue its severe tightening of monetary policy for a longer period. Remember that the market now anticipates rate increases of 0.5% in March and 0.25% in May. Mr. Knot did note that if core inflation does not start to drop, the regulator may decide to keep raising the rate by 0.5% in May. Consequently, when inflation (as we said) is decreasing at an undesirable rate, the rhetoric of ECB representatives is gradually starting to tighten. Inflation has been increasing for almost a year now, but it can decrease for twice as long. "To break is not to build," as they say.

By the way, if we look at the EU's core inflation statistic, we can see right away that it has not dropped at all. There has been no change since December, when the peak value of 5.2% was recorded. Many people think that regulators focus more on the fundamental indicator, which ignores changes in the cost of food and energy. Consequently, it is logical to predict that the ECB will need to enhance monetary pressure if the current economic situation persists. By the way, core inflation in America is also taking its time to decline. It has been consistently rising and declining over the past year, staying within the same range of 5.9% and 6.6%. Although the prior four months have gone down, the deceleration in January was only 0.1%. In principle, the Fed can restrict the use of "hawkish" language. This indicates that rates may increase more than what the market anticipates, both in the US and the EU. The only uncertainty is how much more powerful they will become. We do not rule out the possibility that the euro will continue to create a new upward trend in 2023, given the possibility that the ECB rate will rise above the Fed rate. But for now, at least a noticeable downward correction is required to eliminate overbought conditions and get ready for this new trend.

As of February 16, the euro/dollar currency pair's average volatility over the previous five trading days was 85 points, which is considered "normal." Hence, on Thursday, we anticipate the pair to move between 1.0618 and 1.0788. The Heiken Ashi indicator's downward turn will signal a potential continuation of the downward movement.

Nearest levels of support

S1 – 1.0620

S2 – 1.0498

S3 – 1.0376

Nearest levels of resistance

R1 – 1.0742

R2 – 1.0864

R3 – 1.0986

Trade Suggestions:

The EUR/USD pair continues to trend downward. At this point, if the Heiken Ashi signal reverses downward and the price is below the moving average, it is feasible to think about opening new short positions with targets of 1.0620 and 1.0498. After the price is locked above the moving average line, long positions can be initiated with targets of 1.0788 and 1.0864.

Explanations for the illustrations:

Determine the present trend with the use of linear regression channels. The trend is now strong if they are both moving in the same direction.

Moving average line (settings 20.0, smoothed): This indicator identifies the current short-term trend and the trading direction.

Murray levels serve as the starting point for adjustments and movements.

Based on current volatility indicators, volatility levels (red lines) represent the expected price channel in which the pair will trade the following day.

A trend reversal in the opposite direction is imminent when the CCI indicator crosses into the overbought (above +250) or oversold (below -250) zones.