The EUR/USD pair started the trading week on a major note: during Monday's Asian session, traders tested the resistance level of 1.0950 (the upper line of the Bollinger Bands indicator on the daily timeframe). However, the bulls failed to settle above this target. After reaching 1.0960, the pair retreated as if intimidated by reaching such highs.
The weekly chart indicates that the bullish momentum has practically faded. Inflation reports published in the United States in mid-November triggered price turbulence in the pair, allowing buyers to change the price range. In the early autumn, traders hovered within the range of 5-7 figures, and now they have consolidated within the range of the 9th figure. However, to maintain their positions (and for the further development of the uptrend), buyers need not only to settle above the resistance level of 1.0950 but also to conquer the 10th figure.
In my opinion, traders are indecisive due to several fundamental factors, which we will discuss below. But first, note an important point: despite failing to overcome the resistance level of 1.0950, the pair is still staying around the 9th figure. Corrective declines look modest – sellers cannot seem to pull the price into the range of the 8th figure. This indicates that bullish sentiments prevails. However, a powerful impetus is necessary for a breakthrough, allowing the bulls to enter and settle in the area of the 10th figure.
Moreover, the pair's growth is restrained by several fundamental factors. Firstly, it's the market's confidence that the Federal Reserve will keep interest rates at their current level for quite some time. The option of another rate hike is not excluded, although the probability of this scenario is quite low. These "moderately hawkish" sentiments provide background support for the greenback. It acts as a kind of anchor for EUR/USD, significantly hindering price growth.
Recent events in China have also played a role. At the end of last week, news reported that an "undiagnosed respiratory illness" that leads to pneumonia in children is spreading widely in China. The reports were illustrated with photos from the country's hospitals where large queues were forming. The sharp increase in the number of respiratory diseases in China worried market participants, although it is more of a flashback to the past, as the coronavirus pandemic began with exactly such reports. However, Chinese authorities have already stated that they have not identified any "unusual or new pathogens," and the increase in diseases is caused by several known pathogens. In other words, Beijing has officially ruled out a repeat of 2020, so this information trigger will gradually lose its relevance.
In regards to the prospects of the uptrend, it is necessary to note that the market has already played out the actual completion of the current tightening cycle of the Fed's monetary policy – this fundamental factor has ceased to "work." US inflation reports did their job – they weakened traders' hawkish sentiment and exerted significant pressure on the greenback. In turn, the EUR/USD pair rose to the area of the 9th figure and paused, awaiting another impetus.
In the current circumstances, another upward surge can occur for two reasons: a) the Fed softens its rhetoric and begins to discuss the conditions and timing of policy easing; b) the European Central Bank tightens its position and allows for another interest rate hike in the near future. If conditions "a" and "b" are realized simultaneously, then in this case, the ideal storm will occur, in the waves of which EUR/USD buyers will settle in the range of the 10th figure, and possibly test the 11th price level. However, for the "perfect storm" to occur, corresponding conditions are required: further decline in inflation in the US and an increase in inflation in the eurozone.
I would like to remind you that this week (specifically on Thursday), the eurozone inflation report will be published, as well as the core Personal Consumption Expenditures index (one of the most important indicators of inflation growth in the US). So, according to preliminary forecasts, the Consumer Price Index is expected to decrease to 2.7% in November, and the core index to 3.9%. The core PCE index in the US is also expected to demonstrate a downward trend, decreasing to 3.5%.
If the indicators come in line with forecasts, the dynamics of EUR/USD will depend on the comments from officials of the Fed and the ECB. For instance, if the Fed begins to discuss the timing of rate cuts, and the ECB maintains a hawkish stance (i.e., does not rule out another interest rate hike), the pair will climb higher, even despite the slowdown in inflation in the eurozone. In the event that central banks do not change their rhetoric, it will be challenging for the bulls to stay within the range of the 9th figure, let alone conquering the 10th figure.
However, if eurozone inflation begins to pick up and the core PCE index meets forecasts, hawkish comments from the ECB may not be necessary – the bulls will draw their own conclusions in favor of the euro.
In this construct, there are too many "ifs." Inflation reports to be published on Thursday will likely narrow down the possibilities, especially if they deviate from forecast values. Given the significance of these releases, it can be assumed that in the near future (i.e., until Thursday), traders may find it challenging to settle within the range of the 10th figure, even if they test the 1.1000 target. The fundamental and technical picture indicates a preference for long positions in the EUR/USD pair (buying on corrective declines), but approaching the boundaries of the 10th figure, participants should exercise caution and consider profit-taking.
