Since the middle of last week’s trading, the price of the euro currency pair against the dollar, EUR/USD, has been exposed to selling operations. It is starting from the resistance level 1.0760, reaching the support level 1.0516, and closed the week’s trading stable around the level of 1.0665.
The selling operations came even with the European Central Bank raising interest rates by 0.50%, as it was expected, which reassured market observers that the financial sector in the bloc still enjoys liquidity and stability. Investors were wary of a lower-than-expected rate hike, following the collapse of the SVB and mounting fears of more bank runs.
Meanwhile, the US dollar could remain in a weaker position as investors price in weaker prospects for more aggressive Fed tightening moves. Remember, Fed Chairman Jerome Powell previously indicated that they are ready to accelerate the pace of raising US interest rates or raise the final level of interest rates, but these expectations are now called into question after the return of financial market problems.
Investors are likely to start pricing in expectations for the March FOMC decision early this week, which could lead to some bearishness for the dollar due to potentially dovish comments. In general, the EUR/USD exchange rate approached its lowest level in the new year at one point last week, but it will lead to a technical reversal of the six-month recovery trend on the charts in the event of any daily closing below the level of 1.0548, according to the analysis.
The European single currency, the Euro, pared its losses to trade short of 1.07 on Friday, following a near failure with the approximate figure of 1.05 in the mid-week session. With this recovery, the Euro avoided triggering the recently completed “head and shoulder reversal pattern.” formed on the charts. For his part, Paul Sianna, chief technical strategist at Bank of America, says, “The US dollar index (DXY) has breached the neckline of the pattern, which indicates that it is confirmed and can rise to 106.60, 107.80, and possibly 109.45, provided it remains above the lowest level of the right shoulder at 104.09.”
The analyst added, “EUR/USD has not breached its neckline now at 1.0548, but it is close. A daily closing below this will confirm the top and estimate a drop to 1.0335, 1.0285, and maybe 1.01, while it remains below 1.07.” He also said that the technical outlook for the US dollar index and its component currency pairs is bullish over a period of one to three months.
A bullish outlook for the dollar index suggests a bearish outlook for EUR/USD, given that it makes up about 57% of the index. The analyst added, “The daily charts for DXY and EUR are showing head and shoulders trend reversal patterns that support our bullish view for the US dollar starting in February. DXY has already broken above the neckline at 105.30 (confirmed) while the Euro is sitting at the neckline at 1.0548 (unconfirmed).
The euro gained little, if any, on Thursday after the European Central Bank (ECB) pushed ahead with the previously mentioned interest rate hike but didn’t say much about what to expect for the months ahead. This leaves the euro driven by economic data emerging from the eurozone and the directional direction of the dollar, which will be largely determined by next Wednesday’s interest rate decision from the US Federal Reserve (Fed) and accompanying forecast update.
Thursday’s updated projections indicate that the European Central Bank is about to view itself as having done enough already on interest rates in order to ensure a timely return of inflation to the 2% target, but the bank’s official position depends on economic data. However, on the other side of the EUR/USD equation, economists and markets have been revising bearish projections to imply uncertainty about whether the Fed will raise interest rates this week or any more from here, which seems to be weighing heavily on the dollar lately.
Technical analysis of the EUR/USD pair:
- The EUR/USD is moving sideways on the 4-hour chart, finding support at 1.0533 and resistance at 1.0760.
- Overall, the EUR/USD has sold off sharply recently and then bounced on testing the bottom of the range.
- Stochastic is moving higher to show that bullish pressure is present and could bring the EURUSD back to the resistance level.
- The oscillator has room to rise before it reverses exhaustion among the buyers, so the rally could continue until it reaches the overbought zone.
- Likewise, the RSI has a lot of ground to cover before reaching the overbought territory to indicate that the bullish pressure is about to fade.
However, the 100 SMA is still below the 200 SMA to confirm that there is a chance that selling will resume soon. EUR/USD is approaching testing the 200 SMA, a dynamic inflection point, near the key psychological resistance at 1.0700.