The EUR/USD currency pair's trading remained subdued and undetectable on Monday. Once more, the price failed to exhibit a strong trending movement, initiate a correction, and even surpass the moving average line situated very nearby. In terms of the 4-hour TF, there was no movement at all on Monday. On the one hand, this market behavior is expected, given the lack of any significant news or events in the US or the EU on Monday. Nothing prompted a reaction. On the other hand, this week's calendar is packed with significant events, so the market may already be anticipating them. It could have, but it chose not to this time. As a result, we have continued on an upward trend up to this point, which has long raised many concerns. As we've already mentioned, the pair's growth is completely logical from a technical standpoint because all indicators point upward. Fundamentally speaking, however, the euro currency's downward correction following its rapid and illogical growth should have begun two weeks ago.
Important inflation reports and meetings of all three central banks that are relevant to us will take place this week. Since these events frequently overlap, we won't predict how the market will respond to them at this time. In response to such important reports, there may be a delay of several hours or even a day. Most of the time, traders will be forced to respond to the following event without planning. We also want to remind you that trading sessions impact how the market reacts. If the Fed meeting's outcomes are disclosed late evening, European exchanges cannot make any sense of them. As a result, the response of Europeans can be anticipated the following morning, when reports and data will be made public.
Will US inflation continue to fall?
In theory, there is almost no reason to doubt it will continue. It has already been falling for four consecutive months while the Fed's key rate has been rising. There is, therefore, no justification for anticipating that inflation will suddenly resume its downward trend. We also need to remember that any change in interest rates has a long-term impact (as many Fed members have stated). In other words, if the rate changes, it will take three to four months for key macroeconomic indicators to reflect. Therefore, there is absolutely no reason to anticipate the end of the consumer price index slowdown. The sole issue is how quickly it will deteriorate.
According to official predictions, inflation will decrease to 7.3–7.6% y/y by the end of November. The actual value, in our opinion, will be closer to 7.3%, which will support the Fed's decision to begin easing up on the pace at which it tightens monetary policy. On the one hand, this is bad news for the US dollar because the rate at which the market has been actively selling the dollar hasn't slowed down recently. However, it is the ratio of the Fed rate to the ECB rate that matters, not the Fed rate itself. Unexpectedly for many, the European regulator may also increase its rate this week by 0.5%. That is, to slow the rate at which monetary policy is tightening, despite European inflation, which is currently at 10%, only began to decline at the end of November. From our perspective, one decline is too minor to discuss a particular trend. The current key rate of the ECB is 2%, which is not even close to the "neutral level" at which pressure on inflation (and the economy) starts to build. As a result, we are certain that the decrease in inflation in November was coincidental. It's just one slowdown, in any case. The market may therefore view the ECB's decision to start easing up on its apparent aggressive stance, which was intended to curb high inflation. We think that the factors contributing to the euro's decline are increasing daily.
As of December 13, the euro/dollar currency pair's average volatility over the previous five trading days was 88 points, considered "average." So, on Tuesday, we anticipate the pair to fluctuate between 1.0453 and 1.0625. An upward turn of the Heiken Ashi indicator will indicate a potential continuation of the upward movement.
Nearest levels of support
S1 – 1.0498
S2 – 1.0376
S3 – 1.0254
Nearest levels of resistance
R1 – 1.0620
R2 – 1.0742
R3 – 1.0864
Trading Suggestion:
The EUR/USD pair is still moving upward. Therefore, until the price is fixed below the moving average, long positions with targets of 1.0625 and 1.0620 should be considered. Only after fixing the price below the moving average line with targets of 1.0453 and 1.0376 will sales become relevant.
Explanations of the illustrations:
Linear regression channels – help determine the current trend. The trend is strong if both are directed in the same direction.
The moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction in which trading should be conducted now.
Murray levels are target levels for movements and corrections.
Volatility levels (red lines) are the likely price channel in which the pair will spend the next day, based on current volatility indicators.
The CCI indicator – its entry into the oversold area (below -250) or into the overbought area (above +250) means that a trend reversal in the opposite direction is approaching.
