EUR/USD. Overview for May 16th. Week preview. Lagarde’s speeches, inflation, and GDP reports
May 16, 2023 7:25 am
The EUR/USD currency pair began a microscopic correction against last week’s decline on Monday. The correction is so weak now that it’s difficult to consider it a pullback. The pair has settled below the moving average line for the first time in 2.5 months and did not immediately resume its upward movement. Therefore, it is reasonable to expect a continuation of the euro’s decline, which is logical. We remind you that the European currency has grown for two months, adding about 600 points. Still, there were a few fundamental and macroeconomic reasons for such a movement. In other words, the news from the US was not so bad as to prevent the dollar from growing, even within a correction.
The situation may change now. The American currency looks much more confident than the European one. This is confirmed by the stronger statistics from across the ocean and the fact that both central banks are already close to the end of the monetary policy tightening cycle. We remind you that the prolonged fall of the dollar began after inflation in the United States began to slow down in the fall of last year. The market has almost fully priced in all the Fed’s rate hikes and then began to price in the ECB’s rate hike. But now that the ECB is close to the end of tightening, the euro has no reason to continue to appreciate.
The 24-hour TF clearly shows that the last upward movement exceeded the last local maximum by only a few tens of points. This suggests we have seen the final upward trend of the past 9–10 months. If so, a downward trend will start forming now. It may not be very strong, but the dollar should at least gain back 300–400 points, at a minimum.
Comments on inflation will be expected from Lagarde. The GDP report, which will be known today, is unlikely to interest anyone. It should be remembered that GDP reports rarely deviate from forecasted values. The inflation report in the Eurozone on Wednesday will be much more important. Interestingly, forecasts speak of a new acceleration in price growth rates up to 7% (previous value: 6.9%). Thus, there may be a steady pace at the end of April, another reason for the ECB to tighten its rhetoric and plans for the rate again.
We have already said earlier that the ECB is not a magician and cannot raise the rate as it pleases. Since the pace of tightening has already slowed to a minimum, we expect another 1-2 hikes, regardless of how quickly inflation will fall. Therefore, it is no longer important whether the consumer index is falling quickly or not falling at all – there is practically no correlation with the key rate. Based on this, a strong reaction to the inflation report can only occur if the actual value is sharply different from the forecasted one. If inflation accelerates by 0.3% or more, then the European currency may show strong growth, as the ECB may, in this case, add a rate hike in 2023. If inflation does not change or minimally decreases, then the euro currency may continue to fall. But the inflation report will act more as background than a push for the market to take immediate action.
Also, this week, we can note two speeches by Christine Lagarde, from whom comments on inflation and monetary policy will be expected. Toughening the rhetoric of the ECB’s head can support the euro currency. Still, we do not believe the regulator will suddenly increase aggression in the comments after easing monetary pressure. Most likely, both times, Ms. Lagarde will stick to neutral and standard statements. Other speeches by the ECB’s monetary committee representatives will also occur. Usually, its other members are much more eloquent than the chairman.
The average volatility of the euro/dollar currency pair for the last five trading days as of May 16th is 73 points and is characterized as “average.” Thus, we expect the pair to move between levels 1.0810 and 1.0956 on Tuesday. A reversal of the Heiken Ashi indicator back down will indicate a resumption of the downward movement.
Nearest support levels:
S1 – 1.0864
S2 – 1.0742
S3 – 1.0620
Nearest resistance levels:
R1 – 1.0986
R2 – 1.1108
R3 – 1.1230
Trading recommendations:
The EUR/USD pair has left the sideways channel and can now continue forming a new downward trend. Short positions should be considered after the Heiken Ashi indicator turns down, with targets of 1.0810 and 1.0742. Long positions will become relevant again when the price is fixed above the moving average with targets of 1.0956 and 1.0986.
Explanation of illustrations:
Linear regression channels – help determine the current trend. If both are directed in one direction, the trend is currently strong.
Moving average line (settings 20.0, smoothed) – determines the short-term trend and direction in which trading should now be conducted.
Murrey levels – target levels for movements and corrections.
Volatility levels (red lines) – the probable price channel in which the pair will spend the next day, based on current volatility indicators.
CCI indicator – its entry into the oversold area (below -250) or the overbought area (above +250) means that a trend reversal in the opposite direction is approaching.
The material has been provided by InstaForex Company – www.instaforex.com
The EUR/USD currency pair began a microscopic correction against last week’s decline on Monday. The correction is so weak now that it’s difficult to consider it a pullback. The pair has settled below the moving average line for the first time in 2.5 months and did not immediately resume its upward movement. Therefore, it is reasonable to expect a continuation of the euro’s decline, which is logical. We remind you that the European currency has grown for two months, adding about 600 points. Still, there were a few fundamental and macroeconomic reasons for such a movement. In other words, the news from the US was not so bad as to prevent the dollar from growing, even within a correction.
The situation may change now. The American currency looks much more confident than the European one. This is confirmed by the stronger statistics from across the ocean and the fact that both central banks are already close to the end of the monetary policy tightening cycle. We remind you that the prolonged fall of the dollar began after inflation in the United States began to slow down in the fall of last year. The market has almost fully priced in all the Fed’s rate hikes and then began to price in the ECB’s rate hike. But now that the ECB is close to the end of tightening, the euro has no reason to continue to appreciate.
The 24-hour TF clearly shows that the last upward movement exceeded the last local maximum by only a few tens of points. This suggests we have seen the final upward trend of the past 9–10 months. If so, a downward trend will start forming now. It may not be very strong, but the dollar should at least gain back 300–400 points, at a minimum.
Comments on inflation will be expected from Lagarde. The GDP report, which will be known today, is unlikely to interest anyone. It should be remembered that GDP reports rarely deviate from forecasted values. The inflation report in the Eurozone on Wednesday will be much more important. Interestingly, forecasts speak of a new acceleration in price growth rates up to 7% (previous value: 6.9%). Thus, there may be a steady pace at the end of April, another reason for the ECB to tighten its rhetoric and plans for the rate again.
We have already said earlier that the ECB is not a magician and cannot raise the rate as it pleases. Since the pace of tightening has already slowed to a minimum, we expect another 1-2 hikes, regardless of how quickly inflation will fall. Therefore, it is no longer important whether the consumer index is falling quickly or not falling at all – there is practically no correlation with the key rate. Based on this, a strong reaction to the inflation report can only occur if the actual value is sharply different from the forecasted one. If inflation accelerates by 0.3% or more, then the European currency may show strong growth, as the ECB may, in this case, add a rate hike in 2023. If inflation does not change or minimally decreases, then the euro currency may continue to fall. But the inflation report will act more as background than a push for the market to take immediate action.
Also, this week, we can note two speeches by Christine Lagarde, from whom comments on inflation and monetary policy will be expected. Toughening the rhetoric of the ECB’s head can support the euro currency. Still, we do not believe the regulator will suddenly increase aggression in the comments after easing monetary pressure. Most likely, both times, Ms. Lagarde will stick to neutral and standard statements. Other speeches by the ECB’s monetary committee representatives will also occur. Usually, its other members are much more eloquent than the chairman.
The average volatility of the euro/dollar currency pair for the last five trading days as of May 16th is 73 points and is characterized as “average.” Thus, we expect the pair to move between levels 1.0810 and 1.0956 on Tuesday. A reversal of the Heiken Ashi indicator back down will indicate a resumption of the downward movement.
Nearest support levels:
S1 – 1.0864
S2 – 1.0742
S3 – 1.0620
Nearest resistance levels:
R1 – 1.0986
R2 – 1.1108
R3 – 1.1230
Trading recommendations:
The EUR/USD pair has left the sideways channel and can now continue forming a new downward trend. Short positions should be considered after the Heiken Ashi indicator turns down, with targets of 1.0810 and 1.0742. Long positions will become relevant again when the price is fixed above the moving average with targets of 1.0956 and 1.0986.
Explanation of illustrations:
Linear regression channels – help determine the current trend. If both are directed in one direction, the trend is currently strong.
Moving average line (settings 20.0, smoothed) – determines the short-term trend and direction in which trading should now be conducted.
Murrey levels – target levels for movements and corrections.
Volatility levels (red lines) – the probable price channel in which the pair will spend the next day, based on current volatility indicators.
CCI indicator – its entry into the oversold area (below -250) or the overbought area (above +250) means that a trend reversal in the opposite direction is approaching.
The material has been provided by InstaForex Company – www.instaforex.com
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