On Thursday, the EUR/USD pair continued its strong upward movement, reaching the Murray level "2/8" (1.0986) on Friday and bouncing off it. We expected the start of a downward correction (at least) on Thursday, but the outcomes of the ECB and Bank of England meetings influenced our plan. The ECB and BoE took a rather hawkish stance on Thursday, triggering a new strengthening of the European currency and the pound. However, on Friday, with a weakened macroeconomic background and a complete absence of fundamentals, the pair showed volatility no less than on Wednesday and Thursday, but in the opposite direction.
The correction we witnessed is not just regular; it can and should be the beginning of a prolonged decline. Of course, the pair can move in the opposite direction for quite some time, completely contradicting fundamentals, macroeconomics, and common sense. We have repeatedly listed all the reasons why the euro has no grounds to continue rising. Have we witnessed a two-month appreciation of the euro? This should be the end of it. This is if we talk about justified movement.
If we talk about inertia, the euro can rise to $1.50 or even higher. Why is that impossible? The market can continue buying European currency for any reason, even if there is none because the market is made up of people. And people are not obliged to follow technicals, macroeconomics, or fundamentals. So, what we are warning about is that, in a more logical scenario, there is still a decline in the pair. This remains true despite Powell being less hawkish than desired and despite Lagarde's more hawkish stance than desired. Nothing changes because of that.
Also, note that a "double top" pattern has formed on the euro at the moment, which is visible on almost any chart. Such a pattern is a sign of a trend reversal. Adding to this, there have been four entries into the overbought territory for the CCI indicator. What does this result in? It means that the euro has no other choice but to continue falling.
Lane's speech is the most interesting event of the week in the EU.
What can we expect next week? It can be said right away that all the most interesting things in December have already passed. The market is preparing for the Christmas and New Year holidays, so volatility may decrease again, although sharp emotional spikes and volatility are still possible in a "thin" market. In the EU, there will be a few important events next week. On Monday, the IFO Institute indices in Germany will be noteworthy. Business expectations, the current situation index, and the business climate index will be published. We do not consider these indices important, and the market's reaction to them may be extremely limited.
On Tuesday, the EU will release the second, final assessment of inflation for November. We all understand that the second assessment rarely differs from the first, so traders are likely to have nothing to react to. On Wednesday, ECB Chief Economist Philip Lane will speak, but what can he tell the market after Christine Lagarde spoke first last week, and on Friday, both Holzmann and de Guindos spoke? Nothing is interesting in the events calendar in the EU and Germany on Thursday and Friday.
It turns out that there will be no really important macroeconomic or fundamental events this week. Of course, there will be American events and reports, but even there, things are quite scarce. Therefore, we expect a correction against the rise on Wednesday and Thursday, as well as low volatility.
The average volatility of the Euro/USD currency pair over the last 5 trading days as of December 17 is 97 points and is characterized as "high." Thus, we expect movement between levels 1.0797 and 1.0991 on Friday. The reversal of the Heiken Ashi indicator back upward will indicate a possible resumption of the upward movement.
Nearest support levels:
S1 - 1.0864
S2 - 1.0742
S3 - 1.0620
Nearest resistance levels:
R1 - 1.0986
R2 - 1.1108
R3 - 1.1230
Trading recommendations:
The EUR/USD pair has settled above the moving average line, but we do not believe that the rise can continue. The price perfectly reached the targets of 1.0974 and 1.0986, after which it began to fall. Buying the pair can be done on a bounce from the moving average, but we believe that a further decline is more likely. The new overbought condition of the CCI indicator indicates a much more probable decline. Short positions can be opened with a re-fixing below the moving average with a target of 1.0742.
Explanations for the illustrations:
Linear regression channels - help determine the current trend. If both are pointing in the same direction, the trend is strong.
The moving average line (settings 20.0, smoothed) - determines the short-term trend and direction in which trading should currently be conducted.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the likely price channel in which the pair will spend the next day, based on current volatility indicators.
CCI indicator - its entry into the overbought area (below -250) or the oversold area (above +250) indicates that a trend reversal in the opposite direction is approaching.