The last trading week was notable for its high volatility. The pair fluctuated in a wide price range: the high of the week was 1.0710, the low was 1.0485. Despite such turbulence, traders couldn't decide on the vector of the price movement and stopped at 1.0645.
There is no doubt that volatility for the pair will be big next week. The upcoming events of a fundamental nature can provoke serious price fluctuations which will probably help the bulls or the bears to break out of the "vicious circle" of a wide-range flat.
Remember that last week's main reports were the minutes of the Federal Reserve and the Non-Farm Payrolls. The minutes of the December Fed meeting provided support for the dollar, but they did not answer the most troubling questions for traders - in particular, whether the central bank is ready to revise the final point of the current cycle of tightening rates downward (now declared to the 5.1% mark), and is the central bank ready to slow the rate hike to 25 basis points? These questions remained unanswered. The central bank only assured the markets that it would keep rates "at a high level" in 2023.
As for Nonfarm, the situation is also contradictory. On the one hand, US unemployment fell to 3.5%, and employment growth numbers came out in the green. On the other hand, the wage component of the report was disappointing, as it was in the red zone, significantly underperforming the forecasted estimates.
Contradictory signals did not help either bulls or bears of the pair. It was further complicated by the eurozone inflation report. The general consumer price index slowed down more than forecasted, while the core index showed a reverse trend and rose to the 5.2% mark.
As a result, the pair was noted around the 7th figure during the week, then around the 4th figure, but ended trading almost in the middle of the range. Traders obviously need help. Comments of European Central Bank and Fed representatives, as well as more information are necessary. That is why the key events of the coming week may provoke strong price turbulence on the pair.
First, Fed Chairman Jerome Powell will deliver a speech. On Tuesday, January 10, he will attend an international symposium organized by the Bank of Sweden. Powell may comment on the latest US labor market data, assessing the prospects for further tightening of monetary policy. On the same day, Isabelle Schnabel, a member of the ECB's Executive Board, will also deliver a speech.
Secondly, next week (Thursday, January 12) we will receive the most important report for the EUR/USD: the US CPI data for December. According to preliminary expectations, the CPI will come out at 6.5% y/y (November: 7.1%) and the core index will come out at 5.7% y/y (November: 6.0%). If the real numbers match the forecasts (not to mention being in the red zone), the dollar will come under pressure, because in that case we can talk about a stable trend of slowing inflation in the US.
In other words, in the coming week, traders must pay attention to Powell's rhetoric and to the US inflation report. These are the fundamental events that can push the pair out of the wide price band: to develop an uptrend, the bulls need to settle at the 7th figure area, to develop a downtrend, the pair must settle at the 5th price level (but ideally, of course, go under 1.0500).
But at the beginning of a new trading week, China can set the tone. And here it is difficult to predict the market's reaction to China's last message.
On the one hand, we found out that Beijing has effectively abandoned its "zero-Covid" policy. For the first time in three years, the country has fully opened its borders. As of today, that is, as of January 8, China has abolished the mandatory quarantine for visitors from abroad: now those arriving from abroad only need to present a negative result of a coronavirus test with a period of time not exceeding 48 hours.
On the other hand, the easing of quarantine in China comes amid a huge wave of coronavirus infections. Covid is already spreading through industrial, factory towns in China, causing serious consequences. According to the Chinese news website Caixin, in late December and early January, suppliers in major export provinces (such as Zhejiang, Jiangsu, Guangdong and Shandong) faced serious delays in delivering products to customers. Many home appliance manufacturers, for example, were operating at 25-50% capacity.
In other words, there are two sides of the same coin in this situation. The mere fact that they abandoned the zero-Covid policy may put pressure on the greenback, at the expense of an increased appetite for risk. But the gloomy consequences of this decision (not of a medical nature, but of an industrial and economic nature) may "spoil the appetite" of traders, so the opposite is not excluded - the growth of anti-risk sentiment in the markets. We will know which way the markets will go on Monday.
Thus, the pair is now at a crossroads. Conflicting results of the previous week did not let traders determine the direction of the price movement. However, the events of the coming week are likely to "redraw" the fundamental picture of the pair. We don't know if it's in favor of the downside or the upside.
