31.01.2023 09:05 AM
EUR/USD. Analysis for January 31. The dollar is anticipating "hawkish" Fed signals.

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The wave analysis of the euro/dollar pair's 4-hour chart hasn't changed much recently and is still complex. Although its amplitude is more appropriate for the impulse section of the trend, the upward section of the trend has a strong corrective and is too extended. The wave pattern a-b-c-d-e that we were able to obtain features a wave e that is far more complex than the other waves. Since the peak of wave e is substantially higher than the peak of wave C, if the wave analysis is accurate, then this pattern's development may be nearly finished. I'm still expecting the pair to fall because we're expected to develop at least three waves in this scenario. The demand for the euro either increased or stayed consistently high throughout the first few weeks of 2023, and the pair was only able to deviate marginally from previously established levels during this time. Failure to surpass the 1.0953 level, which corresponds to the Fibonacci ratio of 161.8%, will be interpreted as a sign that the market is prepared to lower demand for the pair. Unfortunately, there is still a delay in developing the trend correction section.

On Monday, the euro/dollar pair decreased by 20 basis points, and the amplitude was low in the morning. As I previously mentioned, the amplitude has decreased significantly recently. However, in my opinion, this is a typical market response to a background of zero news. In January, the market actively countered its forecasts. We may say that the US inflation report catalyzed a new decline in the US dollar, as the majority then decided to slow the Fed's rate of tightening policies once more. However, several weeks have gone by since then, and even in the context of a corrective slowdown, demand for the US dollar is not increasing. Since corrections are a natural component of any trend segment, I think the market's behavior is extremely peculiar. It must take place nonetheless. However, for this to happen, the dollar must be supported by the news. This is how the activity should go in an ideal situation. Without news, the market can boost demand for US dollars, but with news context, it will be simpler and easier.

I am thus anticipating speeches from Christine Lagarde this week that is "dovish" and rhetoric from Jerome Powell that is "hawkish." Since analysts and economists now believe that the European economy is weak and that a recession is likely to occur in 2023, which may force the central bank to reduce the interest rate increase step again, it will undoubtedly be simpler to wait for the first one. Given that Christine Lagarde has repeatedly warned that the rate will rise due to high inflation, such a turn of events may come as a surprise to the market. This suggests that we won't likely wait for either the first or second possibility. The chance for the dollar, therefore, rests on Friday's labor market data and the European inflation report, from which you should take the lowest value.

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Conclusions in general

I draw the conclusion that the upward trend section's development is about finished based on the analysis. As a result, given that the MACD is signaling "down," it is now possible to consider sales with targets close to the predicted mark of 1.0350, or 261.8% per Fibonacci. The potential for complicating and extending the upward section of the trend remains quite strong, as does the likelihood of this happening. The market will be ready to finish the wave e when a move to break through the 1.0950 level fails.

The wave analysis of the downward trend section notably becomes more intricate and lengthens at the higher wave scale. The a-b-c-d-e pattern is most likely represented by the five upward waves we observed. After the development of this section is complete, work on a downward trend section can start.

Chin Zhao,
Analytical expert of InstaForex
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