The EUR/USD pair started the trading week rather quietly, without any gap, almost at the level of Friday's closing. This suggests that Friday's trading fuse has come to naught: the bears managed to pull the price under 1.0800, but further prospects for the downward movement were questionable. However, the quiet start of the trading week does not indicate that the pair will continue to move in the horizontal channel. On the contrary, we've got plenty of volatility ahead of us: bears will try to build on their success (or at least hold their positions within the frame of the 7th figure), while the bulls will be trying to take revenge to win back their lost positions. Every fundamental event will be used by traders to their advantage. Let's look at the main news of the week.
On Monday, February 6, markets will focus on European Central Bank President Christine Lagarde's speech. She will take part in a meeting with the president of the European Council, the head of the European Commission and the president of the Eurogroup.
There are rarely any specific messages or intentions at this level of meetings, but given Lagarde's previous stance, she may repeat the hawkish signals indicating a willingness to raise rates at the March meeting by 50 points. This message won't have any impact on the euro (as it was mentioned at the ECB's February meeting). However, if the ECB head hints at further rate hikes, that's when the bulls will get a strong reason to launch a counterattack.
If Lagarde is the main newsmaker on the first trading day, then on Tuesday, February 7, traders will focus on her colleague Federal Reserve Chairman Jerome Powell. He will participate in a discussion hosted by the chairman of the Economic Club of Washington. The event is quite narrowly focused, so Powell is sure to comment on the latest Nonfarm. Let me remind you that the U.S. labor market data, released last Friday, turned out to be a pleasant surprise: the unemployment rate fell to a 53-year low (3.4%), and the indicator of employment growth jumped by 517,000(!). While the wage indicator (in annual terms) continued to show a downtrend.
The latest figures allow Powell to be more confident not only about the March 25-point hike, but also about the longer term prospects. As of today, there is a 66% chance of a 25-point rate hike in May (according to the CME FedWatch Tool). But if Powell sounds indecisive in the face of strong Nonfarm (e.g. calling for inflationary growth), the dollar bulls will get a major blow and their position will shake considerably, even in the EUR/USD pair.
The economic calendar is not very eventful on Wednesday, February 8. The tone of the trades will be set by the Fed members, who will speak during the US trading session. You should pay attention to the stance of John Williams, head of the New York Fed. He has a permanent right to vote in the Committee and is considered one of the most influential members of the Fed. Ahead of the February meeting, Williams said that slowing rate hikes "makes sense" as "the Fed is nearing the end of its policy tightening cycle". If he reiterates that the end is near, the dollar will be under pressure. Actually, that was the reason why the greenback fell across the entire market after the Fed's February meeting: Powell made it clear that the central bank does not intend to exceed the previously declared target (5.25%), and possible calibration of the final point is only possible in the downward direction. If Williams voiced a similar position, the dollar will be under pressure.
Also on Wednesday, the other Fed officials, Michael Barr (centrist) and Christopher Waller (predominantly hawkish), will speak.
Thursday's main report is Germany's inflation data. According to preliminary forecasts, the consumer price index will show an uptrend in January. The CPI may move up after two months of decline and post a reading of 8.9% (y/y). The harmonized consumer price index should similarly reflect an uptrend, coming in at 10.0% (after falling to 9.6%). If the real numbers match the forecasts (not to mention the greenback), the euro will receive substantial support. Let me remind you that last week's report on the growth of pan-European inflation turned out to be very contradictory: amid slowing overall inflation, the core index remained at a record high of 5.2%. The German figures may either reinforce concerns about price pressures in the European region or weaken the ECB hawks' position (the latter looks unlikely).
At the end of the trading week, two Fed members, Christopher Waller and Patrick Harker, will speak during Friday's U.S. session. They are considered as representatives of the "hawkish wing" of the Fed, so their comments may provide additional support to the greenback.
There is also an important report on the Consumer Sentiment Index from the University of Michigan. It is a very important leading indicator of future consumer spending. According to preliminary projections, the index is expected to rise again (for the third month in a row), rising to 65.0 points (the highest since last April).
The forthcoming week is not full of important macroeconomic events. The key point is the ECB and Fed representatives (especially Lagarde and Powell) who are likely to assess the latest reports through the prism of future prospects. In addition, the German inflation report may lead to increased volatility in the EUR/USD pair.
In general, at the moment, there are no signals that would indicate which position we should prioritize. Obviously, the "Nonfarm factor" has already played itself out for the most part, hence it is risky to enter selling. At the same time, Powell's more hawkish mood might encourage a bearish momentum: in that case, the pair might test the support at 1.0720 (the bottom line of the BB on the daily chart). But the alternative scenario in which the Fed chief (and his colleagues) remain cautious in spite of the strong Nonfarm is not excluded. In that scenario, bulls might seize the initiative (especially if Lagarde sounds hawkish and German inflation exceeds expectations). In this case, the price is likely to return to the range of 1.0850-1.0950.