Last week was marked by several important fundamental events for the EUR/USD pair.
The rhetoric of the Federal Reserve and the European Central Bank
Several Fed officials were hawkish last week, effectively refuting rumors that the central bank was ready to revise the final level of the current monetary tightening cycle downward. James Bullard, Esther George, Laurie Logan, and Patrick Harker made it clear that the previously announced "final stop" in the 5.1-5.25% range (and even 5.50% according to Bullard) remains in effect. At the same time, George, Logan and Harker allowed a slowdown in the pace of interest rate hikes to 25 points (while ruling out the option of lowering the final rate in the second half of this year). This Fed stance allowed the bears to extinguish the bullish momentum.
However, they failed to implement the bearish scenario: the week's low was 1.0768, while Friday's trading ended at 1.0856. The ECB came to the aid of the EUR/USD bulls and its representatives also denied the dovish rumors about the central bank. In particular, ECB President Christine Lagarde declared her adherence to a hawkish course, noting that the central bank needs to make several more significant steps to stop inflation growth. The minutes of the ECB's December meeting, released last Thursday, were also clearly hawkish. All of these signals suggested that the ECB will implement the 50-point scenario not only at the February meeting, but also at the March meeting.
The scales are in balance
In fact, the pair is languishing in place: despite the fact that the price fluctuated within the 100-point range, traders finished the trading week almost at the opening level (with a slight, 20-point tilt to the upside). The scales tipped to one side or the other, but in the end remained in an equilibrium state. Bulls couldn't go to the area of the 9th figure, bears couldn't settle lower than 1.0800. It is obvious that in the coming days the struggle between the parties will only intensify, because very soon - in early February - the Fed and the ECB will hold their next meetings. In anticipation of these events each more or less significant report will provoke increased volatility in the pair.
Monday
On Monday, January 23, the main news flow will come from Europe. In particular, we will receive a preliminary assessment of the consumer confidence indicator in the eurozone. This indicator has been showing positive values for the last three months, but remains in the negative area. According to forecasts, in January the indicator will rise to -20 points (from the previous value of -22). Also on Monday, ECB representatives Lagarde and Fabio Panetta will speak. Lagarde spoke in Davos last week, providing support to the euro with her hawkish stance.
Tuesday
On January 24, PMIs will be released, reflecting the dynamics of business activity in the manufacturing and service sectors in Germany, France and the European region as a whole. According to preliminary forecasts, there will be a slight improvement in both manufacturing and services sectors in January. For example, the German business activity index in the manufacturing sector should rise to 48 points. If that's the case, the positive momentum will be recorded for the third straight month.
During Tuesday's US session, we will find out the value of the dynamics of business activity in the manufacturing sector in the US. Here the picture is reversed: the index has been declining for the third month in a row. If it comes out at the projected level (not mentioning the red zone) in January, in which case we can already speak about a firm trend. The negative picture can be complemented by the Fed-Richmond manufacturing index, which should fall to -5 points in January. This is bad news for the dollar bulls.
Wednesday
On Wednesday, January 25, EUR/USD traders will focus on a report from the German IFO Institute. The figures should follow the PMI trajectory, reflecting an improvement in business sentiment in Germany. Thus, according to forecasts, the IFO business climate indicator will come out at around 90.0 (in this case, growth will be recorded for the third straight month), the current situation is at around 95.0 (growth for the second straight month), and, finally, indicator of economic expectations at the level of 85.0 (growth for the fourth straight month).
Thursday
The most important report will be published on January 26, which will surely provoke increased volatility not only for the pair, but for all dollar pairs. This is the preliminary estimate of the growth of the US economy in the 4th quarter of 2022. According to preliminary forecasts, the volume of US GDP will increase by 2.6%. Let me remind you that the US economy grew by 3.2% in the third quarter. The dollar will be under strong pressure if the report turns out to be in the red zone. There will be rumors in the market that the Fed will be forced to end the current cycle of monetary tightening ahead of schedule, having revised the level of the final interest rate downward.
Friday
A no less important macro report will be published on the last trading day of the coming week. We are talking about the Core Personal Consumption Expenditures Index (PCE). This is the most important inflation indicator monitored by the members of the Fed, which could cause increased volatility among dollar pairs - both in favor of and against the greenback. According to preliminary forecasts, Friday's report will reflect a further slowdown in the growth of the index. Thus, on an annualized basis, the index should come in at 4.4%. If the forecast comes true (not to mention the lower values), then we can talk about a settled trend here (a consistent three-month decline), amid a slowdown in the Consumer Price Index and the Producer Price Index. Growth or deceleration of this index will play an important role, especially against the background of contradictory statements of Fed representatives regarding the scale of monetary tightening.
Findings
In general, the upcoming trading week is likely to be quite volatile: the February meetings of the Fed and the ECB are already on the horizon, so all the macro data will be considered by the market through the prism of possible decisions of the central bank. Preliminary forecasts (according to the main macro data) suggest that the dollar may come under additional pressure. If the reports come out at least at the projected level, bulls will try to test the upper limit of the 1.0780-1.0890 price range in order to test the 9th figure.
