The week ahead: Will the EUR USD reach cloud 9?
The world's most traded currency pair might hit a new 9-month high this week as markets assess the latest policy signals from the US Federal Reserve and the European Central Bank.
To be clear, this will be a busy week that goes beyond important central bank decisions (the Bank of England is in action too). There will also be the largest tech profits and maybe an OPEC+ decision. In other words, the following significant economic data releases and events are poised to shake major asset classes this week:
Monday, January 30
- NZD: New Zealand December external trade
- CNH: Mainland China markets reopen after Lunar New Year
- EUR: Eurozone January economic confidence
- IMF publishes World Economic Outlook update
Tuesday, January 31
- JPY: Japan December unemployment, retail sales, industrial production
- AUD: Australia December retail sales
- CNH: China December industrial profits, January PMIs
- EUR: Eurozone 4Q GDP
- USD: US January consumer confidence
- Exxon Mobil earnings
Wednesday, February 1
- NZD: New Zealand 4Q unemployment
- CNH: China Caixin manufacturing PMI
- EUR: Eurozone January CPI and manufacturing PMI, December unemployment
- GBP: UK January manufacturing PMI
- Brent: OPEC+ meeting
- USD: Fed rate decision
- Meta earnings
Thursday, February 2
- EUR: European Central Bank rate decision
- GBP: Bank of England rate decision
- USD: US weekly initial jobless claims
- S&P 500: Earnings from Alphabet, Apple, and Amazon
Friday, February 3
- CNH: China January services/composite PMI
- USD: US nonfarm payrolls report
Here are the market expectations for the Fed meeting next week:
- On February 1st, the Fed will raise interest rates by 25 basis points (bps).
- The Fed will raise rates by another 25 basis points following next week's meeting, but no later than June 2023.
- These two increases would raise US interest rates from 4.5% to roughly 5%.
- The Fed will then hold its target rate near 5% for a time before lowering interest rates later this year.
On the ECB side of things:
- The ECB is projected to raise rates by 50 basis points next week, which is double the amount of the Fed's forthcoming move.
- The ECB is expected to boost rates by another 75 basis points before the end of the year.
In a nutshell:
- Fed = 50 basis point rises to remain (including next week's 25 basis point boost).
- ECB = 125 basis point rises remaining (including next week's 50 basis point boost)
The belief that the ECB will raise interest rates more aggressively than the Fed has propelled the EURUSD to its highest level since April 2022. However, the EURUSD is stabilizing close below a critical Fibonacci level - the 50% line from its January 2021 to September 2022 decline. The market activity shows that the next move for EURUSD may be heavily influenced by what the ECB or Fed announces next week.
Potential EURUSD scenarios:
- The EURUSD might be driven to "cloud 9" if the ECB maintains its hawkish approach while the Fed begins to consider stopping its rate rises (or at least markets do not believe any hawkish tones emanating out of the Fed next week).
Such a result is also expected to boost sentiment in other asset classes, including equities, gold, and perhaps cryptocurrency.
- However, if the Fed initiates a larger-than-expected 50bps raise next week, it will send a clear message that US interest rates will rise over the market-expected 5% objective this year.
Markets now believe the Fed's aggressive intentions (or a combo of the above factors)
... which might quickly reverse some of the EURUSD's recent gains.
Key support/resistance levels for EURUSD:
SUPPORT
- 1.0770 region: previous cycle low, June 2022 resistance zone
- 1.07365: mid-December cycle high
- 1.061 region: 38.2% Fib line and around where the 50-day simple moving average (SMA) resides
RESISTANCE
- 1.09426: 50% Fib line
- 1.112 – 1.114: March 2022 resistance
- 1.11848: end-March cycle high
Markets are projecting a 70% likelihood that EURUSD will move between the 1.07 - 1.105 range over the next week, while implied volatility is back to its year-to-date high, which saw EURUSD's recent run higher.