Currency Pair of the Week: EUR/USD

EUR/USD is at a key inflection point in terms of direction.


The ECB left rates unchanged last week at -0.5% as Christine Lagarde noted that risks were still tilted to the downside due to the slow vaccine rollout, however those downside risks are less pronounced.  She also noted that the ECB was ready to adjust any of its instruments as needed to ensure that inflation moves towards the ECB’s target of 2%.  This comes on the heels of lockdowns and restrictions in Europe because of the coronavirus, including countries such as Germany, Spain, and Portugal.  France is considering a new lockdown of its own within days.  With economic data already weak, these lockdowns will continue to hurt the European economy, especially in the service sector. This means continues fiscal and monetary stimulus.  At the December meeting, the ECB extended PEPP through March 2022 and added 500 billion euros to the program.  Germany’s Ifo disappointing to the downside on Monday to its lowest level since July 2020. The focus will turn to inflation and unemployment data from Germany later  this week.  In addition, markets will be watching for headlines related to new restrictions and lockdowns, as well as, vaccine rollout related news.

This week begins President Biden’s first full week in office.  Even before he took office, President Biden proposed a $1.9 trillion economic stimulus program, which includes up to $1,200 in direct aid to individuals in need from the pandemic.  This plan was fully supported by soon to be confirmed Treasury Secretary Janet Yellen, who noted in her confirmation hearing that now is the time to help the economy recover, not raise taxes.  In addition, the vaccine rollout in the US has been remarkedly slow.  Biden has vowed to vaccinate 1,000,00 people in 100 days.   Markets will be watching to see how fast and how well Joe Biden is able to get his agenda implemented.  In addition, the FOMC meets on Wednesday this week.  As with the ECB, expectations are for unchanged, given the Presidents fiscal stimulus package and the exceptional stimulus the Federal Reserve has already provided.  The FOMC will most likely be in “wait and see” mode.  Fed Chairman Powell’s comments afterwards will be watched closely for hints regarding inflation and inflation expectations, as well as his outlook to growth.  US data has been poor as of late, including employment data and retail sales.  This week the economic focus will be on Advanced Q4 GDP and well as the core PCE, which the Fed uses as a gauge for inflation.

Technically, on January 8th, EUR/USD broke lower from an ascending wedge that began in mid-October 2020.  The pair retraced to horizontal support and the 38.2% Fibonacci extension from the low on November 4th, 2020 to the high on January 6th, near 1.2062.  In addition, EUR/USD  broke out of a flag formation (red), which  targets all the way up near 1.2800.  However, based on the angle of the flagpole, which is used as a target for a flag pattern after the breakout, it suggests it may take a few months to get there (remember, price rarely moves in a straight line).

Source: Tradingview, City Index

On a shorter-term 240-minute timeframe, EUR/USD has put in a shorter ascending wedge of its own, which began on December 9th, 2020.  Price broke lower and retraced a full 100% of the wedge to its target near 1.2050 on January 18th.  Since then, price moved higher to near the 50% retracement level from the highs of January 6th to the lows of January 18th,  just below 1.2200.  The daily timeframe suggests higher (flag formation), however, if price falls below 1.2050, it would suggest a move back to the bottom of the ascending wedge on the daily timeframe, near 1.1605.  First support is the 1.2105, followed by the 1.2050 lows and previous resistance near 1.2010.  Resistance comes in near 1.2200 prior highs near 1.2222, and the January 6th highs near 1.2350.

Source: Tradingview, City Index

EUR/USD is at a key inflection point in terms of direction.  Price action this week will depend on the FOMC and vaccine rollout across both Europe and the US.  Any hawkish signs from the Fed could signal a longer term move lower, while unresolved issues with the vaccine rollout could send it higher. 

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