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25.01.2023 11:47 PM
EUR/USD. Why aren't traders going for the 10th figure?

Bulls continue to besiege the 1.0900 mark, making regular (but useless) "raids" to the area of the 9th figure. Having impulsively updated the multi-month high at 1.0928, traders retreated and drifted down. To develop an uptrend, the bulls need to cross the nearest resistance level of 1.0950, which corresponds to the upper line of the indicator Bollinger Bands on the daily chart. For this purpose, it is necessary to have a powerful factor, which will allow us to not only mark the pair in this price area, but also to settle above the given target. Then we can talk about the prospects of breaking the 10th figure: the next price barrier will be 1.1090 (the upper line of the Bollinger Bands indicator on the weekly chart).

The market is getting ahead of the curve

At the moment, the current fundamental background allows the bulls to keep the barrier around the 8th figure, but doesn't allow them to go much higher. On the one hand, many fundamental factors contribute to the upward dynamics: European Central Bank representatives show a hawkish stance, representatives of the Federal Reserve observe the 10-day silence regime (ahead of the February meeting), inflation indicators in the US are slowing down, while the core inflation in the eurozone continues to accelerate. All these circumstances tip the scales in favor of long positions in the EUR/USD pair. On the other hand, traders have doubts - and justifiably so, in my opinion. Almost all of the aforementioned fundamental factors have already been played by the market, while new arguments are needed to organize a new large-scale attack.

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For example, a decline in a number of inflation indicators in the U.S. (Consumer Price Index and Producer Price Index) has given traders confidence that the Fed will slow the pace of rate hikes to 25 points as early as the February meeting. As of today, there is a 97% chance of that scenario materializing (according to the CME FedWatch Tool).

On the other side of the Atlantic, there is also a definite understanding of what to expect from the ECB in the coming months. According to most forecasts, the ECB is certain to hike rates by 50 points at the February meeting, and will almost certainly resort to a 50-point hike at the March meeting. It's noteworthy that as soon as there was talk that the central bank may lower the rate to 25 points in March (Bloomberg published the relevant insider), ECB President Christine Lagarde and some of her colleagues (Peter Kazimir, Gabriel Makhlouf, Gediminas Simkus) promptly dismissed the dovish rumors. The published minutes of the last ECB meeting also confirmed the hawkish stance of the members of the Governing Council.

In other words, as of today the market is certain that the Fed will raise the rate only by 25 points in February, and at the same time, it is sure that the ECB will increase the rate by 50 points at the February and March meetings. So why aren't bulls storming the 10th figure on the back of such fundamental signals?

Traders need information boost

The fact is that the market played all of the aforementioned factors in advance, immediately after the release of inflation reports in the US and Europe. That is when the EUR/USD pair changed its price echelon, rising from 1.0760-1.0850 to 1.0850-1.0950. All subsequent statements by Fed and ECB officials indicate that the Fed is ready to ease to 25 pips and the ECB is ready to keep the 50-point speed. That's why these statements didn't help the bulls cross the upper limit of the new price range to get closer to the 10th figure. De facto, the market played ahead of the curve.

All this suggests that the fate of the uptrend is now "in the hands" of the US data. These reports will enable (or not) the bulls to change the tier, where the upper limit will be 1.1090 (the upper line of the Bollinger Bands indicator on the D1 chart).

Unresolved issues

On the one hand, the fate of the February meeting is effectively "foregone," in the context of the 25-point hike. On the other hand, there are also other unresolved questions.

For example, is the Fed finally ready to end the current cycle of rate hikes, without reaching the declared finale at 5.1%? Under certain conditions, is the central bank ready to allow the option of interest rate cuts at the end of this year? These questions are currently hanging in the air, so the intrigue of the February meeting is still there. That's why, in my opinion, EUR/USD traders are in no hurry to buy: the US central bank can still show character (here we can recall the rhetoric of James Bullard, who recently allowed the rate to rise to 5.50%), supporting the greenback.

Findings

Continued intrigue over the Fed's consolidated position acts as an anchor for the pair. Pulling down, but not sinking.

Most likely, the pair will be trading in the 1.0850-1.0950 range until the Fed's February meeting. At the same time, it is worth recalling that the U.S. GDP report for Q4 2022 will be released on Thursday (January 26). The U.S. economy is projected to grow by only 2.6% over that period. If that report comes out in the red (with such a weak forecast), the market could draw "far-reaching conclusions" and then the greenback would come under pressure across the board. In that case, the bulls might try to take the resistance level of 1.0950. But the alternative option, in which the report ends up in the green zone, is also possible. Such a scenario is likely to keep the range between 1.0850 and 1.0950, even if bears try to break through to the base of the 8th figure. Taking into account the importance of the GDP report, it would be wise to make trading decisions only after the fact.

Irina Manzenko,
Analytical expert of InstaForex
© 2007-2023
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