The EUR/USD pair is trying to recover its position but still remains under pressure, as it trades within the 8-figure range. Overall, the fundamental picture for the pair remains quite contradictory on all fronts. For instance, as soon as the Federal Reserve, through some of its representatives, expressed doubts about easing the monetary policy in the near future, the European Central Bank said that it definitely would not lower rates in the foreseeable future.
However, traders are in need of a strong and, most importantly, unipolar impetus that will strengthen either the bullish or bearish positions of EUR/USD. For now, they have to make do with what they have.
ZEW, Retail Sales, ECB
This week's macroeconomic reports provided support for both the dollar and the euro. In particular, on Monday, the ZEW Indicator of Economic Sentiment for Germany rose to 15.2 in January, surpassing the forecast of 12.0 points. What matters here is not just the actual result but the trend. The index was below zero from May to October 2023. In November, it climbed out of negative territory and has been growing in the positive area since then. The ZEW Economic Sentiment Index for the eurozone also showed positive dynamics, with the indicator rising to 22.7, while most experts expected it to be at 20.2 points.
This provided support for the euro, and in turn, the dollar received support from the retail sales report. Overall retail sales in the United States increased by 0.6% in December (compared to a forecast of 0.4%), and excluding auto sales, they rose by 0.4% (compared to a forecast of 0.2%).
Federal Reserve Board of Governors member Christopher Waller also supported the greenback by stating that the central bank is likely not to rush with monetary easing in light of risks associated with revising inflation data. According to him, the central bank will only lower interest rates if inflation consistently decreases. As we know, the overall Consumer Price Index (CPI) accelerated in December, although the core CPI and PPI (both overall and core) declined, reaching multi-month lows.
By the way, the ECB also maintains a hawkish stance. In particular, ECB Governing Council member Klaas Knot expressed similar sentiments, stating that the markets are jumping into conclusions in terms of rate cuts. According to him, the market's projected rate trajectory is bound to fail.
ECB President Christine Lagarde was not as categorical but still said that the central bank would not consider easing monetary policy at least until June. She mentioned that inflation in the eurozone is "not at the level the ECB desires," so rates will be lowered "in the summer or toward the summer," provided that all necessary conditions are met.
In other words, the ECB is maintaining a "moderately hawkish" position, while it is premature to judge the Fed's position (after the release of December inflation data). Yes, Waller has tightened his rhetoric somewhat, but projecting his words onto the Fed as a whole is incorrect. After Waller's speech, the probability of a rate cut in March decreased but not drastically (from 70% to 60%). As for the ECB, traders are confident that rates will remain unchanged at least until May-June.
Geopolitics and escalation
Geopolitics continues to provide background support for the dollar. In the early hours of Thursday, Pakistan launched a retaliatory strike against Iran, exactly 24 hours after an Iranian missile attack on targets in Pakistan. It turns out that not only are there forces opposing Tehran based in Pakistan, but there are also anti-Pakistan groups within Iran that deserve to be dealt with. In other words, Islamabad responded to Tehran, and even explained its actions with almost identical wording. This comes despite phone conversations between the foreign ministers of these states just yesterday.
However, that's not all. According to Reuters, the Pakistani Armed Forces are currently in a state of "extremely high readiness." Furthermore, it is reported that Pakistani military forces are increasing their presence on the Iranian border, and Islamabad is suspending diplomatic relations with Iran. The situation is so tense that China has offered its mediation services, urging Iran and Pakistan to refrain from escalation. According to a spokesperson from the Chinese Ministry of Foreign Affairs, Beijing is ready to assist in resolving the situation.
Conclusions
The general situation in the currency market remains extremely uncertain. The Fed and the ECB are tightening their rhetoric, macroeconomic reports are being ignored, and geopolitical tensions are escalating. Such a fundamental backdrop does not allow EUR/USD traders to determine the price's direction. The pair is essentially stuck at the border of the 9-figure mark.
In such conditions, it is advisable to focus on technical levels. You may only consider long positions after the bulls break above the resistance level at 1.0930 (the Tenkan-sen line on the daily chart). Short positions should be considered once the bears settle below the support level at 1.0850 (the lower line of the Bollinger Bands indicator, coinciding with the upper band of the Kumo cloud on the same timeframe).
