FX.co ★ EUR/USD: Can we talk about a trend reversal?

The downward trend of the EUR/USD pair has clearly stalled: the bears cannot gain a foothold below the 1.0550 resistance level (the lower limit of the Kumo cloud on the daily chart), despite the attempts made.

Information impulse is needed

For the further development of the downward movement, sellers need a powerful information impulse, while yesterday's January data on the volume of orders for durable goods left a mixed impression, allowing buyers to organize a counterattack in the area of the 6th figure. However, do not forget that the downward dynamics of EUR/USD may be due not only to the strengthening of the dollar, but also to the weakening of the euro. And in this context, the reports on inflation growth in Germany and the eurozone, which will be released in the coming days, are of particular importance. If statistics disappoint with their "red color," the euro-dollar pair will again be under pressure. In that case the bears will try to gain a foothold at the base of the 5th figure again in order to claim the downward territory below 1.0500.

Starting with American statistics, as mentioned above, the U.S. Durable Goods Orders data was released yesterday. The indicator fell by 4.5% against the forecast of a decline of 4%. This is the strongest monthly drop since 2020, when the U.S. felt the effects of the coronavirus crisis. Excluding transportation, new orders rose by 0.7% (most experts predicted that this component of the report would not change). Also yesterday, data on the U.S. housing market was released: according to the January report, pending home sales rose by 8% (growth is recorded for the second month in a row).

Is the downward trend over?

Nevertheless, market participants interpreted yesterday's reports not in favor of the dollar: the EUR/USD pair once again returned to the area of the 6th figure. Today, buyers are trying to build on their success, consolidating above the target of 1.0600.

Is it possible to say under such conditions that the downward trend of EUR/USD, observed over the past four weeks, has ended? In my opinion, no. It is premature to draw such conclusions.

Take a look at the weekly chart of the pair. On February 2, the price updated a multi-month high (1.1034), after which it reversed and began to systematically, consistently decline. Within two weeks, the pair was down 350 pips to 1.0678. Then there was a pause—during the week, traders actually marked time in anticipation of the next information impulse, which didn't take long. Last Friday, the core PCE index was released in the U.S., which provided additional support to the greenback. The pair approached the 1.0510 support level but did not have time to test it due to the "Friday factor."

In other words, the downward trend is accompanied by pauses and regular upward pullbacks. Therefore, the current price rebound should be considered another correction: today, there are no fundamental reasons for the upward reversal.

European inflation will dot the i's

The most important macroeconomic reports will be released in Europe in the coming days (March 1 and 2), which will either weigh the pair down and create conditions for it to go back to the base of the 5th figure or support the euro. If this is the case, the pair might test the 1.0700 resistance level, which is the middle Bollinger band on the D1 timeframe.

On Wednesday, preliminary data on inflation growth in Germany for February is expected. Recall that in January, the German inflation surprised after almost all components of the report came out in the red zone. On an annualized basis, the overall consumer price index continued its downward trend, falling to 8.7% (against the forecast of a decline to 8.9%). The downward trend has been recorded since November 2022. A rather weak result was demonstrated by the Harmonised Index of Consumer Prices (HICP)—both in monthly terms (0.5% with a forecast of 1.2%) and in annual terms (9.2% with a forecast of 10.0%).

According to the forecasts of most experts, the February figures will reflect a further slowdown in inflation in Germany. The general CPI should come out at around 8.5% and HICP at 9.0%.

German data tend to correlate with the pan-European data, which will be released on Thursday (March 2). Preliminary forecasts also suggest that inflation in the euro area will again show signs of slowing. The overall consumer price index for February should come out at 8.1%, with the core at 5.1%. And while the inflation figures will still remain at an unacceptably high level for the ECB, the downward trend will be visible, as they say, with the naked eye (above all for overall inflation). If the above releases come out at the forecast level (not to mention the red zone), the euro may come under pressure as a slowdown in inflation growth will strengthen the ECB's dovish position.

Conclusions

The current rise in the price of EUR/USD is of a corrective nature, there are no good reasons for a trend reversal today. Moreover, the most important statistics for the euro will be released in the coming days, which can put serious pressure on the currency. In such conditions, longs look very risky. Corrective growth should be used as a reason to open short positions with the first target at 1.0570 (the middle line of the Bollinger bands on the four-hour chart coinciding with the Tenkan-sen line) and the second target at 1.0530 (the lower line of the Bollinger bands on the same timeframe).