FX.co ★ EUR/USD Preview of the Week: Hot End to February

The last week of February promises to be volatile. By its end, buyers of EUR/USD will either solidify their advantage, justifying themselves in the area of the 9th figure, or lose initiative again, causing the pair to return to the base of the 7th figure. Recall that at the end of the previous week, traders managed to reach the level of 1.0890 but couldn't hold those positions, concluding the trading session at 1.0821.

The intrigue persists – both buyers and sellers of the pair are capable of strengthening their positions if the stars align in a certain way. There is more than enough informational material.

Monday:

On the first working day, all attention of EUR/USD traders will be on the rhetoric of European Central Bank President Christine Lagarde during the plenary debates on the ECB's annual report in the European Parliament. Last week, Lagarde stated that wage indicators in the eurozone for the fourth quarter of 2023 are "encouraging." If the indicators for the first quarter of this year remain encouraging, "it will be important." This is indeed important because Lagarde has previously stated several times that the fate of interest rates largely depends on wage dynamics.

If during her speech in Strasbourg, the ECB President ties these elements together (downward wage dynamics + prospects for easing monetary policy), the euro may come under significant pressure.

Also, data on new home sales in the United States for January will be released, where sales volume is expected to rise by 0.9%.

Tuesday:

On February 27, the most important news for EUR/USD will come from the United States. Firstly, the indicator of the growth of orders for durable goods will be published. According to forecasts, the total volume of orders in January decreased immediately by 4.7%, excluding transportation – increased by only 0.2%.

Secondly, the Consumer Confidence Index of Americans from the Conference Board will be published. The indicator has been consistently rising for three months and reached 114.8 in January. According to forecasts, the index will also demonstrate positive dynamics in February, rising to 115.1 points. Such a result, or more precisely, the trend itself, will provide support to the American currency.

Another significant indicator is the manufacturing index calculated by the Federal Reserve Bank of Richmond. It is worth noting that the Fed's district includes the District of Columbia, Maryland, North Carolina, South Carolina, Virginia, and most of West Virginia. According to forecasts, the index will come out at -4. On the one hand, the indicator will remain in the negative zone, but on the other hand, it will demonstrate positive dynamics – for the first time in the last five months.

Among the important events on Tuesday, the speech of Federal Reserve Vice Chair Michael Barr should be highlighted. Last week, he already expressed his opinion, which boils down to maintaining a wait-and-see position. He noted the need to see sustainable good data before advocating for an interest rate cut, while the January CPI growth report "reminds that the path to two percent inflation will be uneven." It can be assumed that on Tuesday, he will articulate similar theses, providing support to the greenback.

Wednesday:

The second estimate of the U.S. GDP growth for the fourth quarter of 2023 will be published on Wednesday. According to forecasts, the second estimate will match the initial one (3.3%). Although surprises are not excluded – remember how estimates of U.S. GDP for the third quarter fluctuated (4.9% - 5.2% - 4.9%).

In addition, on this day, three representatives of the Federal Reserve will speak.

Federal Reserve Bank of Atlanta President Raphael Bostic will voice his position. During his recent speech, he predicted the first rate cut "at one of the summer meetings" and another cut in the second half of the year. According to him, there is no urgency in monetary policy easing, but the next step for the Fed will certainly be a rate cut. Bostic's comments may provide some support to the greenback.

Susan Collins, the head of the Federal Reserve Bank of Boston, will also give a speech. In her recent one, she essentially agreed with Bostic's position. On the one hand, she left the door open for a rate cut "later this year," but on the other hand, emphasized that for this step, the economy must slow down. Strong employment data for January, according to her, "eloquently demonstrated why our caution is justified."

New York Fed President John Williams may also lend support to the American currency. In his previous statements, he advocated for a rate cut, but not in the near future. According to him, policy easing may be possible by the end of this year, "but only if necessary." Such a message would be pleasing to dollar bulls.

Thursday:

The U.S. will release a crucial inflation indicator closely monitored by Federal Reserve members—the core Personal Consumption Expenditures (PCE) price index for January. According to preliminary forecasts, the core PCE index grew by 2.8% on an annual basis (the slowest pace of growth since April 2021). If the indicator comes out at least at the forecast level (not to mention the "red zone"), January will be the sixth consecutive month of downward dynamics. Such a result can exert significant pressure on the dollar.

Also, key inflation growth data for Germany will be published. The overall consumer price index is expected to decrease in February to 2.6% YoY, and the harmonized CPI to 2.8%. German data usually correlates with the overall European data, so this report may trigger significant volatility in the EUR/USD pair.

Friday:

On the last trading day, a crucial report for EUR/USD will be published, revealing the dynamics of inflation in the Eurozone.

According to forecasts, the overall consumer price index in February is expected to decrease to 2.5%. It's worth noting that the overall CPI consistently dropped for almost the entire 2023, but in December and January, it started gaining momentum again. If the February figure comes out at the forecast level (or lower), the euro will come under significant pressure, as "dovish" expectations regarding further ECB actions will increase in the market.

Moreover, the core consumer price index should also demonstrate a downward trend, decreasing to 2.9%. This indicator has been continuously declining for six months. February should be the seventh in this series.

During the U.S. session, the ISM Manufacturing Index will be released. This release can support the dollar as it is expected to rise again, this time to 49.5 (the strongest value since October 2022). If the index unexpectedly falls into the expansion zone (above 50.0), we might witness a dollar rally.

In addition, three representatives of the Federal Reserve—Christopher Waller, Mary Daly, and Adriana Kugler—will speak on Friday. The tone of their rhetoric will depend largely on the dynamics of the core PCE index.

Conclusions:

As we can see, an eventful week awaits us, the key events of which can provoke strong volatility in the EUR/USD pair. For the upward trend to develop, buyers need to, firstly, consolidate above the 1.0830 level (the middle line of the Bollinger Bands on the weekly chart) and, secondly, overcome the resistance level of 1.0890 (the lower boundary of the Kumo cloud on the daily chart), which is roughly speaking, approaching the 9th figure.

As we saw last week, the mere fact of an impulsive rise to 1.0890 does not mean anything - buyers could not consolidate their positions and rolled back. Therefore, one can speak about upward prospects only when the pair surpasses the 1.0890 target.

It is advisable to consider selling only after the pair consolidates below the 1.0780 level. At this price point, the middle line of the Bollinger Bands coincides with the Tenkan-sen line on the D1 timeframe. In this case, the next target for the downward movement will be the 1.0700 level—the lower line of the Bollinger Bands on the same timeframe.