This Week: ECB vs Fed, EUR/USD Expecting Breakout
FORECAST OF EURO FUNDAMENTALS
The euro finished last week well, edging closer to the 1.09 resistance level. The European Central Bank (ECB) is now leading the way against the Federal Reserve in a struggle amongst central bank speakers to retain their credibility and stick to a fairly hawkish narrative. Markets are practically seeing through Fed talk of raising the 2023 terminal rate to 5% by focusing on worsening economic indicators from the United States. However, with so many Fed officials presenting a unified front about actually getting inflation down to its goal level, it may be stupid to do so.
The euro's support has been mostly driven by the dollar's decline, but growing inflation in the eurozone and ECB President Christine Lagarde's a hard stance against inflation. She voiced worry that China's re-opening will lead to higher energy costs in 2023, and the ECB will continue to raise interest rates to keep inflation at 2%. This rapidly dispelled any dovish chatter and might be repeated this week, when Lagarde and other ECB officials are slated to speak. With recessionary worries abounding, there is a danger that increasing too quickly may harm the area, but as things stand, it is almost probable that the February rate decision will result in a 50bps increase.
The week ahead appears to be tilted toward the United States, but German data is a wonderful gauge for the eurozone and might boost EZ optimism if real data match predictions. Softer data in the United States would seriously stress Fed hawks, possibly leading to a leg down for the greenback. Durable goods orders are virtually surely going to rise, with Boeing receiving a big flood of orders, while GDP is expected to grow in Q4 2022. Core PCE will also be scrutinized for signs of further inflationary easing. Michigan consumer sentiment data concludes the week, and forecasts predict a significant boost in consumer confidence, which might impact the EUR/USD if realized.
The daily EUR/USD price action shows yet another consolidatory rectangle pattern (pink), indicating market uncertainty, although a breakthrough is imminent. The data for next week may precipitate this move, and a daily candle closure above or below rectangle resistance/support may result in a short-term directional bias. Given that the euro is approaching overbought levels, I don't expect much more big upside (if any) in the near term, and the pair might fall quickly even if bulls get it up to 1.1000.
Resistance levels:
1.1000
1.0936
1.0900
Support levels:
1.0800
1.0774
1.0736
Conclusion
According to IGCS, retail traders are now SHORT on EUR/USD, with 67% of traders holding short positions (as of this writing). We normally adopt a contrarian approach to crowd mood at Fxedeal; but, recent shifts in long and short positions have resulted in a short-term mixed disposition.