27.02.2024 01:55 AM
EUR/USD: Upward impulse cannot be trusted

At the start of the new trading week, buyers of the EUR/USD pair have once again taken control and are moving towards the resistance level of 1.0890 (the lower line of the Kumo cloud on the daily chart). Recall that last week, traders attempted to test this target but stopped at 1.0889, after which sellers took the initiative. However, they couldn't sustain their success, and Friday's trading concluded at 1.0821.

This indicates that while the pair hovers around the 8-figure area, it's premature to speak of a stable trend, especially in anticipation of this week's crucial releases. Buyers need to secure levels above 1.0890 (essentially in the 9-figure area), while sellers aim for levels below the target of 1.0780 (Bollinger Bands' middle line on the timeframe, coinciding with the Tenkan-sen line).

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Note that the upward move on Monday is inherently unreliable, driven by the general weakening of the dollar amid declining Treasury yields. The yield on 10-year U.S. government bonds again dipped below the 4.3% mark on Monday, with an intraday decrease of 0.45%.

Risk sentiments continue to prevail in the market due to the rise of technology companies. The situation is moving with the inertia of the previous week, albeit with some fading momentum. Recall that, last week, the markets strongly reacted to Nvidia's quarterly report, surpassing even the boldest analyst expectations. The company's shares surged by 22% in two days to $823.9 (though later experienced a slight correction).

The American technology giant significantly increased net profit and revenue for the quarter and provided a positive forecast for the future.

However, the excitement surrounding Nvidia is gradually diminishing. Moreover, according to UBS experts, the company may no longer be able to grow at the same rapid pace due to increasing competition.

Another reason to approach the current rise in EUR/USD with caution is the dovish signals from the ECB. In particular, according to European Central Bank board member Isabel Schnabel, the risks of inflation accelerating again have "significantly weakened."

Another representative of the European regulator, the head of the Central Bank of Portugal, Mario Centeno, even stated that the market should be prepared for the idea of lowering interest rates as early as March. According to him, the March meeting will bring a significant amount of new data to the ECB members' table, and some of them "might suggest that we should discuss a reduction in interest rates at this meeting."

Note that the ECB's March meeting will take place next Thursday. Although Centeno emphasized that he is expressing his opinion (rather than announcing a softening of monetary policy), his rhetoric should be considered holistically, along with other signals from the ECB. This includes statements from ECB President Christine Lagarde, who last week stated that the latest wage growth data in the fourth quarter of 2023 are "encouraging."

Lagarde hinted that if this downward trend continues in the first quarter of this year, the ECB may make "appropriate decisions."

The head of the Bank of Greece, Yannis Stournaras, also focused on the wage indicator but specified the prospects for easing monetary policy. According to him, a decrease in wages gives hope that the "ECB is on the right path." Stournaras noted that the Governing Council will not have enough information by the end of the second quarter to make a decision on rate cuts. Therefore, according to him, the most likely date for the first reduction is June.

Thus, the current fundamental background for the pair does not support a sustainable price increase. The EUR/USD pair is rising due to the decline in the U.S. dollar index, which, in turn, reacts to the decrease in Treasury yields.

However, these fundamental circumstances do not allow for a reliable assessment of long positions. Last week, buyers confidently approached the resistance level of 1.0890 but could not consolidate at those levels. Therefore, it is advisable to consider long positions for the pair only after traders overcome this target, essentially establishing themselves within the 9-figure range. In such a case, the next target for the upward movement of EUR/USD will be the level of 1.0990 – the upper boundary of the Kumo cloud on the D1 timeframe.

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