There were no significant movements on the EUR/USD chart this time. In the course of the day, the pair consolidated below the moving average for the second time this week. In my previous reviews, I wrote that the pair might turn to a swing mode. In fact, this is what is happening now. Even such key macroeconomic data as Nonfarm Payrolls is unlikely to cancel this mode. So now, both swings and flat movements are possible together with no activity at all. The fact is that the euro first performed a correction against the main downtrend. Now it is moving against this very correction. It is hard to tell what happens next as the pair may resume the downtrend or may start developing a stronger correction or even an uptrend. Unfortunately, both scenarios are possible in the current circumstances.
The first scenario may be valid as the fundamental background is highly favorable for the US dollar. For instance, the geopolitical conflict in Ukraine still poses a threat to the EU as the energy and food crisis is nearing. Moreover, the Fed's aggressive monetary policy favors the US dollar while the ECB only makes hints about a rate hike. As for the euro, the only thing that gives us hope is that the downtrend cannot last forever. The upward correction has been too short which is why it may be still too far from completion. Even the trendline gives us no clue of where the pair will move next as the price breaks through it every couple of days. The Linear Regression Channel is also of little help here since its lines are pointing in different directions. The COT reports are also uninformative because all that we can see there is that traders are stocking up on the euro. However, in recent months, the euro did nothing but fall.
ECB widely expected to raise the rate
This week, the ECB will have a meeting on Thursday. I think that no key decisions will be announced this time. However, some experts believe that the regulator will end the APP program, which is the program of quantitative easing. This may be the first step to prepare for a rate hike in July. While the Fed openly announces its plans, the ECB keeps them a secret most of the time. Even the news about the end of the APP program in June is a suggestion by experts at Bloomberg. Even if this happens, and the rate is raised by 0.25% in July, the European currency is unlikely to receive strong support. Notably, the central bank should raise the deposit rate first as it is now standing at -0.5%. In the meantime, the Fed may raise its rate by another 0.5% this month and then another 0.5% next month.
This means that the ECB will still have to catch up with its American counterpart. At some point, the euro may advance against the US dollar but not for a long time. I think that the data on US inflation that is due on Friday will play a more important role here. It is crucial to see whether consumer prices have declined after the Fed has raised the rate to 1%. Last month, the CPI slowed down by 0.2% year-on-year. If the decline continues in May, then the policy of the regulator will prove to be right. Yet, a slowdown in inflation in April could be temporary. Even if inflation slows down for the second month in a row, this does not mean that the Fed will abandon its plans to tighten monetary policy. Therefore, the dollar will still have an advantage over the euro in the next two months. The only thing that can support the euro is the technical factor.
As of June 8, the average volatility of the euro/dollar pair in the last 5 days was 81 points which is an average rate. Today, the pair is likely to trade in the range of 1.0618 and 1.0777. An upside reversal of the Heikin-Ashi indicator will signal a new upward cycle.
Nearest support levels:
S1 - 1.0620S2 - 1.0498S3 - 1.0376
Nearest resistance levels:
R1 - 1.0742R2 - 1.0864R3 - 1.0986
Trading tips:
EUR/USD consolidated below the MA and is trying to develop a downward correction. So, you can keep your short positions open with the targets at 1.0620 and 1.0618 until the Heikin-Ashi indicator makes an upside reversal. You can go long on the pair with the targets at 1.0742 and 1.0777 in case the price settles above the moving average. At the moment, the pair is very likely to enter a swing mode.
On the chart:
Linear Regression Channels help determine the current trend. The trend is strong if both lines are moving in one direction.
Moving average (20.0 period, smoothed) determines the short-term trend and the direction to trade in.
Murray levels are the key level to determine price movements and corrections.
Volatility levels (red lines) represent a possible price channel where the pair will spend the next day based on current volatility indicators.
The CCI indicator: when it enters the oversold area (below -250) or the overbought area (above +250), this signals that a trend reversal is approaching.
