4-hour timeframe
The trading week has ended in the foreign exchange market, and we are summing up its results. The week started at 1.2170 and ended at 1.2048. Thus, despite Friday's growth, the pair significantly fell during the week, by more than 100 points. Thus, the US dollar continued to strengthen. And from our point of view, it strengthened for only one reason - a technical one. We have repeatedly said that there should be corrections even on strong trends. Now we are seeing such a correction against the upward trend. Any to choose from: a 3-month or 10-month. And since the current movement has the status of a correction, then after it, in theory, the upward movement should resume. It could happen soon, or it could happen in a couple of months. It can start out of the blue, it can start after the Congress and the Senate approve a new package of stimulus measures for the American economy, it can start when this package begins to take effect. Thus, we still keep the option of an upward trend in mind.
Let's go back to summing up the results. Several macroeconomic reports were published in the European Union and not a single interesting and important fundamental event occurred. The European Union is again in the shadow of the United States, where much more important information comes from. The eurozone published the index of business activity in the manufacturing sector, which was 54.7, as well as the unemployment rate, which was 8.3%. These data could be considered positive, as there was no deterioration compared to the previous period. But these reports are not important now. Business activity in the manufacturing sector, in principle, does not cause any concern. As we have mentioned many times, the service sector suffers the most in the context of a pandemic and quarantine. Thus, it was the business activity in the production sector that could make traders react. However, before this indicator was published, on Tuesday the report on the EU GDP in the fourth quarter was released in the first estimate. From our point of view, this is a very important indicator, and it turned out to be better than the forecast values. Analysts predicted a fall in the European economy by at least 1%, and a high of 2.2%. However, in reality, the economy shrank by only 0.7%, which is good news. And a report on business activity in the service sector was published on Wednesday, which did not change much compared to December and reached 45.4. Since the value did not grow much, did not fall much and remained below the 50.0 level, the traders rightly judged that nothing had changed. A more important report for the eurozone was published on the same day. We are talking about the inflation rate for January, which unexpectedly increased by up to 0.9% in annual terms. The forecasts were known in advance (+0.6%), but nevertheless, the consumer price index jumped from a value of -0.3% to a value of +0.9% in a month. Whatever the reasons, this is very good news for Europe. The report on retail sales was released on Thursday, which increased in December compared to November by 2.0%, which is already good, but slightly fell short of the forecast values. And this was the latest report from the European Union this week.
Now let's talk about a more important factor. How the market reacted to the EU macroeconomic reports. In short, they didn't. Moreover, it is understandable that the data on business activity or retail sales were ignored, but why did they ignore the reports on GDP and, most importantly, inflation?! These are very important reports and their meanings were unexpected for traders. One way or another, the euro continued to fall, so it is easy to conclude that the markets ignored all the reports from Europe. Thus, macroeconomics" remains out of favor with traders. The reason for this can only be our hypothesis regarding more important and significant fundamental factors, which simply overlap the simple and ordinary macroeconomics. In previous articles, we have already talked about the fact that there are two important fundamental factors: "the balance of power between the European and American economies" and "a new stimulus package for the US economy." Market participants pay the most attention to these factors. Moreover, it is even better to say that large and institutional traders do, and not ordinary traders. That is why ordinary statistics are now simply not taken into account (with rare exceptions). Thus, we recommend tracking changes in more global factors than inflation and GDP.
What should everyone do with this? First, trade exclusively by technique and not try to guess the reversals of the pair, especially global ones. Second, to closely monitor the topic on a new stimulus package for the US economy. If it is approved and adopted, then, with a high degree of probability, the dollar will fall by another 500-600 points in the near future. New hundreds of billions of dollars will simply pour into the US economy, which will simply increase the supply of this currency in the foreign exchange market. Third, each fundamental hypothesis should be treated as a hypothesis and not as a fait accompli. Therefore, technical confirmation is required. At the moment, the EUR/USD pair, according to the Ichimoku indicator system, has settled above the critical Kijun-sen line. Therefore, we believe that the pair has already made a big step towards a new upward trend on Friday. Of course, there is no need to get ahead of ourselves. Bulls still need to overcome the Senkou Span B line, near which attempts to break the current trend often end. Nevertheless, the first step to moving up has been made.
Recommendations for EUR/USD:
For long positions:
On the 4-hour timeframe, the EUR/USD pair may have started a new upward trend. Most likely, following Friday's growth, at least a slight downward pullback will be required, afterwards the pair will likely strive for the Senkou Span B line (1.2120), to which there are still 80 points. This is a perfectly achievable target for the next two trading days. And you can try to reach it. You are advised to trade bullish as long as the price is above the Kijun-sen line.
For short positions:
You can open short positions when the price has finally settled below the critical line with the initial target at the support level of 1.1943. In this case, the downward trend may try to resume. But much will also depend on the global fundamental factors that we mentioned above.
