20.07.2022 06:51 AM
Overview of the EUR/USD pair. July 20. It is time for the ECB to seriously tackle the problem of inflation

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On Tuesday, the EUR/USD currency pair resumed its upward trend. Additionally, it is sharper and stronger than it was on Monday. If on the first trading day of the week there was not a single macroeconomic or fundamental basis for the strong growth of the European currency, then on Tuesday, there was. However, we will discuss them briefly below. Let's start with the fact that there were grounds, but it's far from the case that they caused the pair's rise, as the pound rose during the day, albeit not as much as the euro. Thus, we may deduce that the European Union inflation report altered the sentiment on the foreign exchange market.

Nevertheless, do not overlook the technical aspect. Recall (although this is common knowledge) that the European currency has been sinking against the dollar for nearly two years and has updated its 20-year lows multiple times. Consequently, an upward technical correction may be the primary explanation for the recent appreciation of the European currency.

Thus, we would not prematurely celebrate the end of a lengthy downturn. This coming Thursday, the ECB will hold a meeting at which the regulator's response to the most recent inflation report will be revealed. There is ample evidence to suggest that she will be absent. In this event, the European currency may fall as rapidly as it has climbed over the past week. Remember that most fundamental and geopolitical reasons continue to favor the US dollar. This money cannot grow indefinitely. If we believe that the geopolitical struggle in Ukraine will endure for several years, this does not imply that the dollar will rise and the euro will decline for the duration of this period. The Fed has not yet completed its rate hikes, so this reason alone can support the dollar until at least the end of the year.

The European Union's inflation continues to rise consistently.

The European Union's consumer price index grew 8.6% year-over-year by June. Remember that the previous figure was 8.1%. Consequently, we are experiencing rather quick growth in inflation. In addition, the ECB is practically completely inactive. The European regulator will confront a difficult decision tomorrow.

On the one hand, he has already pledged to increase the key interest rate by 0.25 percent. On the other hand, it is crystal evident to everyone that a 0.25 percent increase is trivial, and the consumer price index will not even detect such a monetary policy tightening. Consequently, there is a hypothetical option of increasing the rate by 0.5 percent, but this is not now possible. We predict the euro will decline due to the ECB's decision to boost interest rates by 0.25 percent. Traders are probably purchasing euros at this time to offset a future rate increase. Then, when the rate increases, the opposite occurs, i.e., the euro/dollar pair would decrease. But if the ECB raises rates by 0.5%, the market may be caught off guard, and the pair's growth may continue. Anyway, let us not speculate. The pair is already positioned above the moving average line, indicating an upward trend.The European economy is a factor that can prevent the ECB from raising interest rates. Not even Ukraine's current condition (which is not so dire), but rather the geopolitical conflict's potential for disastrous outcomes. Recall that the EU's most important issue remains its refusal to purchase oil and gas from Russia. But what should replace them? Currently, the European Commission and the states are carrying out these actions. President Joe Biden of the United States has agreed to expand oil supplies from Saudi Arabia to the European Union.

In contrast, the President of the European Commission has agreed to increase gas supplies from Azerbaijan. In any event, though, these are only agreements with undetermined implementation dates. And it is entirely uncertain whether Saudi Arabia and Azerbaijan's production capacities will be sufficient to compensate for Russia's rejection of hydrocarbons fully. If insufficient, the economy may have major difficulties. This is why the ECB is hesitant to raise interest rates.

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As of July 20, the average volatility of the euro/dollar currency pair for the previous five trading days was 119 points, which is considered "high." Thus, we anticipate the pair to trade between 1.0116 and 1.0354 today. The downward reversal of the Heiken Ashi indicator signifies a downward correction.

Nearest support levels:

S1 – 1.0132

S2 – 1.0010

S3 – 0.9888

Resistance levels closest:

R1 – 1.0254

R2 – 1.0376

R3 – 1.0498

Recommendations for Traders:

The EUR/USD pair continues its ascent. Maintain long positions with goals of between 1.0354 and 1.0376 until the Heiken-Ashi indicator turns bearish. Sales will become relevant when the pair anchors below the moving average with a target of 1.0010.

Explanations for the figures:

Channels of linear regression – aid in determining the present trend. If both are moving in the same direction, the trend is now strong.

Moving average line (settings 20.0, smoothed) – determines the current short-term trend and trading direction.

Murray levels serve as movement and correction targets.

Volatility levels (red lines) represent the expected price channel the pair will trade within over the next trading day, based on the current volatility indicators.

The CCI indicator — its entry into the oversold area (below -250) or the overbought area (above +250) indicates that a trend reversal is imminent.

Paolo Greco,
Analytical expert of InstaForex
© 2007-2024
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