The upward attack finally broke down: EUR/USD bulls could not conquer the 15th figure, after which the bears seized the initiative. The pair was under pressure on Friday after the release of quite good Nonfarm data. However, on the last day of last week, EUR/USD bulls were still active, counterattacking on the declines. Whereas today is categorically in favor of the US currency. And although the pair still remains within the 14th price level, the dollar clearly dominates the pair today.
On the one hand, we can talk about the intermediate victory of the bears, who were able to extinguish a fairly powerful upward momentum. But on the other hand, it is too early to talk about the resumption of the downward trend now. If we look at the weekly chart, we will see that the pair has only slightly corrected after a 350-point rise in early February. Although bears are exerting pressure, they cannot go below the 1.1400 mark. From a technical point of view, they need at least to settle below the average line of the Bollinger Bands indicator, which corresponds to the 1.1410 mark. Therefore, despite the bearish picture of the daily chart, it is still impossible to talk about a reversal of the situation. The dollar clearly needs an additional information driver that would "guarantee" an increase in hawkish sentiment among Federal Reserve members.
It is worth noting that bulls and bears of EUR/USD are considering key macroeconomic releases through the prism of the prospects for monetary policy of the European Central Bank and the Fed. For example, the euro's ascent began after the publication of data on inflation growth in Germany. Although the main components slowed down their growth, they still came out in the green zone. Pan-European inflation has fulfilled the role of a "control shot": the main indicators jumped again, updating another record high. The overall consumer price index was at 5.1% in January (after rising to 5.0% in December). The core index, excluding energy and food prices, rose to 2.3%, with a forecast decline to 1.8%. Core inflation slowed down its growth slightly, but still remained at high values.
Against the background of such results, ECB President Christine Lagarde did not rule out the possibility of an interest rate increase within the current year. At the same time, earlier she repeated with enviable persistence the phrase that the increase in inflation is temporary, and, therefore, the central bank should not rush to tighten the parameters of monetary policy. However, at the end of the February meeting, Lagarde did not say "yes", but she did not say "no" either. She made it clear that this issue will be discussed in a practical way at the March meeting. It is quite logical that after such a plot twist, assumptions began to appear on the market that the central bank would accelerate the pace of curtailing the APP program and raise the interest rate on deposits in the second half of the year. Some analysts have voiced a more hawkish forecast, according to which the ECB will raise the deposit rate by the end of 2022, bringing it to zero.
In the wake of such optimism, the EUR/USD pair has made a 350-point journey, until traders still did not think about the fact that all the above hawkish conclusions are somewhat premature. After all, de facto Lagarde did not announce a tightening of monetary policy, but only refused to deny such a scenario. While Fed Chairman Jerome Powell, following the results of the last meeting, directly stated that the central bank may consider raising the rate at each meeting. After these words, market participants began to estimate the chance of an increase in the rate at the March meeting at almost 100%. At the same time, the probability of four rate increases during the year is more than 85%, five increases – almost 60%, six - a little more than 30%. The head of the Fed noted that much will depend on the incoming data. He made it clear that the Fed is ready to act until it curbs record inflation. But at the same time, the central bank will act with an eye on Nonfarm, so that the aggressive pace of monetary policy tightening does not become an anchor for the labor market.
That is why the dollar strengthened its positions after Friday's Nonfarm. The number of people employed in the non-agricultural sector in January increased by 467,000 (with a growth forecast of 110,000), and the average hourly wage increased by 0.7% on a monthly basis and by 5.7% on an annual basis. Some components of the December release were revised upwards.
In other words, Friday's report allowed dollar bulls to hope for a strengthening of the Fed's already hawkish mood. And if US inflation also does not disappoint traders, the dollar may increase its pressure throughout the market, including in pairs with the euro. We will find out the January figures by this Thursday (February 10). According to preliminary forecasts, inflation will show growth again: the general consumer price index on an annualized basis should update the multi-year high and reach the level of 7.3%, the core index - at the level of 5.9% (YoY). For dollar bulls, it is important that the release comes out at least at the forecast level (not to mention the green color).
Summarizing what has been said, we can come to some conclusions: a) the current decline in the EUR/USD price is of a corrective nature; b) the European currency has received support from the ECB, but this support is based only on the assumptions of traders and experts; c) the dollar can strengthen its position if US inflation turns out to be in the green zone.
Against the background of such a fundamental picture, long positions on the pair look risky. The market has won back Lagarde's "hawkish silence", but traders need additional arguments to continue the EUR/USD upward trend. There were no such arguments, so the bears successfully seized the initiative against the background of good Nonfarm. Now it's up to US inflation. It is advisable to open short positions when bears gain a foothold below the average line of the Bollinger Bands on the weekly chart (that is, they will go below the 1.1400 mark). In this case, the next target of the downward movement will be the 1.1330 mark – this is also the average line of the Bollinger Bands, but only on the daily timeframe.
