The EUR/USD wave layout on the 4-hour chart looks rather clear and complex. The entire ascending section of the trend has a complex structure. It has taken a clearly corrective and extended form which looks more like a momentum section. So, we have a complex corrective wave pattern consisting of a-b-c-d-e parts where wave e has a more complex structure than the previous four waves. If the current wave setup is correct, then this structure may be nearing its completion or has already been completed as the peak of the wave e is much higher than the peak of the wave c. If so, we can expect the formation of at least three descending waves. So, I still anticipate a decline in the pair. In the first two weeks of the year, the demand for the euro has increased and the pair has only retreated slightly from the previous highs. A successful attempt to break through the 1.0721 level, which corresponds to the 127.2% Fibonacci level, indicates that the e wave may become even more extended. It seems that the corrective section of the trend will be formed later.
Inflation in Germany to set the tone in the EU
EUR/USD declined by 10 pips on Monday which is a very narrow fluctuation range. Still, the demand for the euro is rising, or at least it is not declining. As I've mentioned before, the uptrend in the European currency may continue indefinitely. If so, there is no sense in analyzing wave patterns as they will be getting more complex every time. That is why I prefer to analyze standard wave patterns and still expect to see a descending section of the trend.
If we analyze why the market stays bullish on the euro, we will see only one actual reason. I'm talking about the ECB which is likely to continue raising the rate at the upcoming meetings while the US Fed will most likely slow down the pace of monetary tightening as soon as this February. This driver may continue to boost the euro's growth. On Tuesday morning, Germany will issue the inflation report for December which is expected to show a decline to 8.6% from 10% on a yearly basis. As this is just the initial stage of a slowdown in prices, the ECB will not be reacting to this dynamic at this point. Inflation is still running high in many EU countries, and the ECB rate is not high enough to limit CPI every month. The regulator needs to hike the rate by at least 100 basis points and this may happen at its next meeting. Meanwhile, the US central bank is expected to lift the rate by 50 or 75 basis points at the most. Such a gap in the rates of the two central banks may further support the European currency. However, I think that the market has already priced in this factor as wave e has taken a very complex form and we need to wait for strong downward signals.
Conclusion
Based on the analysis above, I can conclude that the ascending section of the trend is nearing its completion. With this in mind, I would recommend selling the pair with the targets located at 0.9994, which corresponds to the 323.6% Fibonacci level, following sell signals of the MACD indicator. It is also highly possible that the ascending section of the trend will get a more extended form. A failed attempt to break through 1.0950 will indicate that the market is ready to complete wave e.
On higher time frames, the wave layout of the descending section of the trend is getting longer and more complex. We have identified five ascending waves that most likely make up the a-b-c-d-e pattern. The pair may start a downtrend as soon as this trend section is completed.
