Last week, traders of the EUR/USD pair could not determine the direction of the price movement. Bears and bulls took turns seizing the initiative, but they remained within the price range of 1.0900 – 1.0990. Such dynamics reflect how indecisive traders are - both bulls and bears of EUR/USD. On the one hand, during such uncertainty, it is best to maintain a wait-and-see position, observing the development of events outside the market. On the other hand, we can't ignore how precise the pair is bouncing off the limits, tempting us with its predictability. This pendulum swung with the same range throughout the week, allowing for precise entries into long and short positions (and closing positions with the same accuracy). The only catch is that at some point, this pendulum will "not return" to its original position. The pair will either continue its uptrend or make a 180-degree turn, heading "south" for a significant correction.
If we look at the weekly chart, we will see that the pair has been briskly moving upward for seven weeks, rising from the 1.0540 mark to this year's high of 1.1076. The uptrend stalled last week when bulls could not approach the borders of the 11th figure. Bears seized the initiative, but quickly ran out of steam at the 1.0910 mark. Since then, the pair has been moving within the 9th figure, alternately bouncing off the limits of the price range.
In other words, if we abstract away from price fluctuations "within" the week, we can come to the obvious conclusion that traders have simply paused the month-and-a-half uptrend. At the same time, EUR/USD bears were unable to take advantage of the situation: traders got stuck in a flat, 100-point price range.
Arguments in favor of the downward movement
The bearish prospects are based on two pillars: hawkish statements from Fed representatives and a strengthening of risk-off sentiment. For example, Monday's downward cycle was due to the hawkish statement by Christopher Waller, who admitted to several rate hikes within the current monetary tightening cycle. Waller was supported by St. Louis Fed President James Bullard, who identified a possible final point at the 5.75% mark. Other representatives of the US central bank also voiced hawkish rhetoric, but mostly in the context of the May meeting.
On the one hand, such signals from the Fed after the recent "bank collapse" in the US are a trump card for the bears. The growth of hawkish expectations (the probability of a rate hike in May is 89%, according to CME FedWatch Tool) strengthened the greenback's position but failed to provoke a dollar rally. The fact is that another 25-point hike is already partly accounted for in prices: after the core Consumer Price Index resumed its upward momentum, the results of the May meeting were predetermined. However, the market is doubtful that the central bank will decide on further steps towards tightening. For example, most of the economists surveyed by Reuters stated that the Fed would raise interest rates by 25 basis points at the May meeting but would then pause until the end of the current year. Meanwhile, 26 of the 106 respondents forecast a rate cut in the second half of 2023.
For this reason, hawkish statements by Waller and other Fed representatives had and will continue to have such a limited impact on the greenback: the market is not in a hurry to look far into the future, while the May hike is already priced in.
Now a few words about the strengthening/weakening of risk-off sentiment in the market.
Throughout the week, market sentiment swiftly changed. On one hand, there was an increase in geopolitical tensions; on the other hand, the Chinese economy surprisingly showed strong growth. The dollar reacted impulsively to the flow of information, but the reaction was short-term in nature.
Another argument in favor of resuming the uptrend of EUR/USD is the ECB's fighting spirit. For example, according to the majority of economists surveyed by Bloomberg, the ECB will raise rates at least at the three upcoming meetings – in May, June, and July. Upon reaching the 3.75% mark (deposit rates) by mid-summer, the ECB may take a pause to assess the effectiveness of the measures already taken. At the same time, most surveyed economists expressed confidence that the central bank would keep rates at the levels reached at least until the end of the current year.
As for the pace of tightening, experts agree on a 25-point hike in May. However, there is an active discussion on this matter, including among the ECB members. In particular, Pierre Wunsch (Governor of the National Bank of Belgium) stated last week that at the May meeting, the central bank will choose between two options: raising the rate by 25 points or by 50 basis points. He clarified that the size of the step "largely depends on April's core inflation." Martins Kazaks (Governor of the Bank of Latvia) voiced a similar position on Friday. In favor of a 50-point hike in May, Bostjan Vasle, the Governor of the Bank of Slovenia, and Robert Holzmann, the Governor of the Bank of Austria, expressed their opinions.
Conclusions
The EUR/USD pair is stuck in the quagmire of a wide-ranging flat – within the 9th figure. Despite the saturated information background, neither bulls nor bears managed to break the situation in their favor. Overall, in my opinion, the current fundamental picture does not favor the development of a downward movement. The dollar is conjuncturally reaping momentary benefits but cannot hold the conquered positions (let alone develop a downtrend in EUR/USD). The euro successfully counterattacks and extinguishes the downward momentum but, in turn, cannot claim the 10th figure. As a result, traders take profit when approaching the 1.1000/1.0900 marks, which contributes to the fading upward/downward movement.
From a technical point of view, on the daily chart, the pair is between the middle and lower lines of the Bollinger Bands indicator, as well as above all lines of the Ichimoku indicator (including above the Kumo cloud), which points to long positions. The nearest target is the 1.1000 mark (the upper Bollinger Bands line on the four-hour chart). If we talk about more ambitious goals, in this case, bulls need to cross the target of 1.1030 (the upper Bollinger Bands line on the daily chart). In such a case, the next price barrier (the target of the upward movement) would be the 1.1100 mark.
