29.03.2023 12:02 PM
EUR/USD creeping higher amid growing risk appetite. Game-changer could happen on Friday

EUR/USD has been creeping higher amid growing risk appetite, hawkish remarks from ECB policymakers, and dovish expectations of the Fed's further policy moves. This fundamental background enables the euro bulls to keep EUR/USD above the level of 1.0800. The upward target 1.0950 is seen as the ceiling of the upward move which coincides with the upper border of the Bollinger Bands on the weekly timeframe. Once this level is passed, traders can predict that the psychological level of 1.10 could be conquered. This scenario is realistic if the economic data released on Friday, namely the eurozone's CPI and the core PCE price index in the US, reveal opposite trends.

Crucial economic data due on Friday

According to the CME FedWatch Tool, the chance of a rate hike by 25 basis points at the Fed's policy meeting in May measures 41.5%. The likelihood of the status quo is 58.5%. The market is still hesitating to make a conclusion. So, investors are evaluating the rhetoric of Fed policymakers who recently softened their tone on further monetary tightening. In contrast, ECB officials have come up with confidence comments, sending hawkish signals.

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Most Wall Street experts reckon that the ECB will raise the key interest rate by 25 basis points at the nearest policy meeting. They also don't rule out the scenario of a rate hike by 50 basis points, especially if inflation in the eurozone continues its robust acceleration. ECB President Christine Lagarde reiterated that the ECB has been monitoring the dynamic of the core CPI when she answered the question about the agenda for further policy moves. Pablo Hernandez de Cos, Governor of the Bank of Spain, echoes the rhetoric of Christine Lagarde. He cleared up the stance of the European regulator, saying that further policy decisions would depend on the dynamic of the core inflation.

In light of such remarks, market participants realize the gravity of the inflation report which will be released on March 31. The EU consumer price index for February will be on tap soon. Importantly, the core CPI is expected to rise again, this time to 5.7%. The annual reading could beat a historic record. Such data will provide the euro with solid support because the ECB will decide in favor of the hawkish move.

Later on Thursday, the US will publish the PCE price index, the Federal Reserve's preferable and closely watched gauge of inflation dynamic. If the core PCE slows down in parallel with the core CPI in the Eurozone, the buyers of EUR/USD are sure to succeed in pushing the price up.

Let me remind you that the US regulator and Jerome Powell in particular toned down their stance at the policy meeting in March. Moreover, the central bank even admitted the dovish scenario which could be implemented by the year end. Earlier, Jerome Powell flatly rejected the assumption of lower interest rates. However, at the last press conference, the Fed's Chair said that such a move was not considered a basic scenario. From his viewpoint, the Federal Reserve will assess the impact of the stress in the financial sector on the US economy and fine-tune its monetary policy accordingly if necessary.

Interestingly, the ECB is more determined about its hawkish agenda. At least, ECB officials reject the scenario of a decrease in interest rates in the visible future.

Thus, the medium-term outlook for EUR/USD will largely depend on the contents of the reports released on Friday. If the core CPI in the Eurozone suddenly declines in line with Lagarde's expectations and the US PCE index comes up in the green, then EUR/USD is likely to dip to 1.06-07. Under the alternative scenario, the currency pair will test the resistance of 1.0950 that coincides with the upper border of the Bollinger Bands on the daily chart and will approach the border of 1.10.


At the moment, the instrument is trading sideways, albeit with a bullish bias. The price is creeping higher. The sellers are trying to take the lead now and then, but still, the overall sentiment is in the bulls' favor. Such a dynamic is caused by the growing risk-on mood. The benchmark stock indices in Asia sharply climbed amid the news on Alibaba. Chinese e-commerce giant Alibaba Group Holding is planning a structural overhaul by splitting its business into six separate divisions. Each division will be managed by its own board and will have its own budget. Divisions will be able to make IPO decisions.

Importantly, European financial markets relieved the anxiety over the contagion in the European banking sector. The overall market sentiment is currently quiet. This factor somehow gives support to the euro.

From the technical viewpoint, EUR/USD is now located between the medium and upper lines of the Bollinger Bands. The price is also above all lines of the Ichimoku indicator, including the Kumo cloud, which generated a bullish signal. This indicates that traders are poised to open long positions. The nearest upward target is determined at 1.0900 which corresponds to the upper line of the Bollinger Bands on the daily chart. The main medium-term target is seen at 1.0950 which is also the upper Bollinger Bands but on the weekly chart.

Irina Manzenko,
Analytical expert of InstaForex
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