The first meeting of the Federal Open Market Committee (FOMC) this year was held, where the regulator took a "dovish" position, which is actually not bad in the current situation.
Fed's Chairman, Jerome Powell, did not give any instructions or changes on the current emergency lending program, instead he only reiterated his previous rhetoric.
"We are going to continue to monitor financial and credit conditions across the economy, and if the emergency conditions are required by law, our emergency lending tools will remain available," Powell said.
He also noted that the battle against COVID-19 is not yet over. Everything will depend on the vaccine and on the timing of when the virus will be taken under full control.
In terms of inflation, the FOMC said that it aims to achieve maximum employment and inflation at 2% in the long term. And since inflation remains steadily below the long-term target, the committee will try to fairly achieve inflation above 2% for some time, so that its average level for a certain period is 2% and long-term inflation expectations will be clearly fixed at the same target level.
Now, let's move to Europe's news background. Olli Rehn, a member of the Board of Governors of the European Central Bank (ECB), said that the regulator is ready to use all the tools necessary to stimulate inflation, and is closely monitoring the strengthening of the euro.
In addition, the ECB recently extended its pandemic stimulus program. And although President Christine Lagarde argued that the eurozone is continuously recovering, the slow implementation of vaccinations and continued lockdowns add to the uncertainty.
Eurozone's inflation is currently at -0.3%, compared to the medium-term target of just under 2%. The surge in the euro rate last year is one of the factors pushing prices down, partly due to lower import costs.
Given the above information, don't you think that now is the time for a full-size correction in the euro with such a high level of overbought?
What happens on the trading chart?
The EUR/USD pair is at the conditional peak of the mid-term upward trend despite everything, where January draws a corrective course in the market. However, if we analyze the entire scale of the upward movement, the Euro still has the overbought status.
A notable moment is the formation of the "Head and Shoulders" pattern on the daily period. This pattern, which is at the peak of the trend, foreshadows a trend reversal based on the theory of technical analysis.
If we go even further, the current trend is already within the limits of the peak of the previous upward trend of 2018 (1.2250/1.2550), where the market just turned.
Is it possible that the long-awaited change of trade interests has come, but it is still too early to draw conclusions. To begin with, it would be logical right now to see a full-sized corrective move in the direction of values 1.2000-1.1810, considering euro's high level of overbought. After that, we could discuss the mid-term prospects in the market.
What is happening in the market at the moment?
The quote just recently reached the well-known support area of 1.2050/1.2070, which can be traced by the dates: December 9 and January 18. This area naturally led to a reduction in the volume of short positions in the market, which led to a pullback in the direction of the coordinate 1.2130.
It is noteworthy the support area of 1.2050/1.2070 was reached the same time the neck level of the "Head and Shoulders" pattern was formed.
What are the prospects and expectations in the market?
It would be most logical to consider the downward positions if we consider the overbought euro and ECB's desire to weaken its rate. Based on the conclusion, sell positions will be considered after the price is held below the level of 1.2050 in the four-hour time frame.
The prospect for the decline is 1.2000, followed by an extension to 1.1810.
An alternative scenario of the market development will be a local price move to the level of 1.2000, without holding below it. This can lead to a wide sideways movement in the market.
What do technical indicators signal?
Analyzing different sectors of timeframes, the indicators in the hourly and daily time frames are still pursuing a corrective course, signaling a sale. Minute interval, in turn, consider a pullback from the support area of 1.2050/1.2070, signaling a buy.
What is happening in the market in terms of volatility?
The recent market activity is below the average level and it was only yesterday that we saw high dynamics (111 points). Perhaps, we are preparing for a huge correction.
Key levels
Resistance zones: 1.2130 *; 1.2350 **; 1.2450 **; 1.2550 ***; 1.2825.
Support zones: 1.2050 *; 1.2000 ***; 1.1890-1.1900-1.1920 **; 1.1810 *.
* Periodic level
** Range level
*** Psychological level
