Analysis of EUR/USD 5M

On Wednesday, EUR/USD showed exactly the movements we anticipated. As a reminder, we mentioned that during important events like central bank meetings, the market often trades impulsively, driven by emotions. Shortly after the event, an equally strong opposite movement often begins. So what did we observe?

The US dollar declined for the entire day. The drop was partly triggered by the weak ADP report in the US, but this report was not the only one to blame for the dollar's weakness. The market clearly expected dovish rhetoric from Federal Reserve Chair Powell. However, when Powell's speech took place and he clearly indicated that the key rate would not change in March, the market initially moved upwards as it was driven by momentum, and then it collapsed. In general, the dollar sharply depreciated at first and then returned to its initial positions.

However, the fact that Powell took a hawkish stance opens up more opportunities for the dollar to strengthen in the coming weeks and months. The market anticipated the first rate cut in March, but there are currently no grounds for that, as we have been writing throughout January. Now, traders should view the dollar more favorably.

Powell also said that rates may stay at their peak value for longer if inflation stays elevated. The labor market remains robust and consistently creates jobs. Therefore, the central bank will only consider a rate cut when the labor market weakens or inflation approaches the target level.

During the European trading session, the pair mostly stayed in place. The first sell signal turned out to be a false signal, but the two subsequent buy signals around the 1.0823 level were accurate and confirmed each other. They led the price to the level of 1.0889, from which an ideal rebound occurred. The profit from the trade was about 40 pips. One could open short positions using the same signal, which also generated a good profit, depending on the timing when the trade was closed.

COT report:

The latest COT report is dated January 23. As seen in the charts above, it is clear that the net position of non-commercial traders has been bullish for quite some time. To put it simply, the number of long positions is much higher than the number of short positions. This should support the euro, but we still do not see fundamental factors for the euro to strengthen further. In recent months, both the euro and the net position have been rising. However, over the past few weeks, big players have started to reduce their long positions, and we believe that this process will continue.

We have previously pointed out that the red and green lines have moved apart from each other, which often precedes the end of a trend. At the moment, these lines are still far apart. Therefore, we support the scenario in which the euro should fall and the uptrend must end. During the last reporting week, the number of long positions for the non-commercial group decreased by 9,100, while the number of short positions increased by 6,600. Accordingly, the net position fell by 15,700. The number of buy contracts is still higher than the number of sell contracts among non-commercial traders by 89,000 (it was 104,000). The gap is quite large, and even without COT reports, it is clear that the euro should continue to fall.

Analysis of EUR/USD 1H

On the 1-hour chart, EUR/USD has already breached the level of 1.0823 four times, so we can expect the downtrend to continue after two weeks of being in a flat phase. The price is below the Kijun-sen and Senkou Span B lines, and Powell took a hawkish position yesterday, which will support the US dollar's strength in the near future.

Today, we believe that the price will continue to "draw fences" with a minimal downward slope. We will consider new short positions with 1.0757 as the target since the US dollar benefited from yesterday's events. Sell signals have formed, and Powell supported the dollar. Therefore, we consider it impractical to buy at the moment.

On February 1, we highlight the following levels for trading: 1.0658-1.0669, 1.0757, 1.0823, 1.0889, 1.0935, 1.1006, 1.1092, 1.1137, 1.1185, 1.1234, 1.1274, as well as the Senkou Span B (1.0894) and Kijun-sen (1.0841) lines. The Ichimoku indicator lines can move during the day, so this should be taken into account when identifying trading signals. Don't forget to set a breakeven Stop Loss if the price has moved in the intended direction by 15 pips. This will protect you against potential losses if the signal turns out to be false.

On Thursday, the eurozone will publish inflation-related data. The focus is on the US ISM Manufacturing PMI. In addition, we have to remind you that the BoE monetary policy meeting will also be a highlight for today.

Description of the chart:

Support and resistance levels are thick red lines near which the trend may end. They do not provide trading signals;

The Kijun-sen and Senkou Span B lines are the lines of the Ichimoku indicator, plotted to the 1H timeframe from the 4H one. They provide trading signals;

Extreme levels are thin red lines from which the price bounced earlier. They provide trading signals;

Yellow lines are trend lines, trend channels, and any other technical patterns;

Indicator 1 on the COT charts is the net position size for each category of traders;

Indicator 2 on the COT charts is the net position size for the Non-commercial group.