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Currency Pair of the Week: EUR/USD

The ECB meets on Thursday for its March interest rate decision meeting.  Expectations are widely held that the central bank with leave rates unchanged.  However, investors will be watching to see if and how the ECB will change its pace of bond purchases.  The Pandemic Emergency Purchase Program (PEPP) is set to expire this month.  However, the ECB said it will continue purchasing bonds under the ongoing Asset Purchase Program (APP) at a pace of 40 billion Euros a month in Q2, 30 billion Euros a month in Q3, and 20 billion Euros a month in Q4.  It will then consider raising rates.  But with an inflation reading of 5.8% for February and a Core CPI reading of 2.7%, one must consider whether the central bank will adjust its pace of bond buying, possibly to end in Q3.  This would leave the door open for a rate hike/hikes in Q4.  Keep in mind that most of February’s inflation has taken place even before the war between Russia and Ukraine had begun.  With commodity prices soaring over the past few weeks, inflation levels are likely to increase before they pull back. Note that the ECB targets 2% inflation.  The ECB also most likely discuss how the Russia/Ukraine conflict adds a new level of uncertainty, which could affect monetary policy.

Last week, Fed Chairman Powell spoke in front of the US Congress in his semi-annual testimony on the economy.  He said that a rate increase should be appropriate when the Fed meets on March 16th.  With that in mind, the US will release February CPI data shortly after the ECB results on Thursday.  Expectations are for a headline YoY print of 7.9% vs 7.5% in January.  The core print, which excludes food and energy is expected to be 6.4%!  Last week, the US released Non-Farm Payrolls.  The US added 648,000 jobs to the economy in February vs +400,000 expected.  The lower Average Hourly Earnings (0% vs +0.6% in January) was the only blemish on a strong reading.  Powell also said in his testimony that the implications of Ukraine war on the US Economy are highly uncertain and that the Fed will be monitoring the situation closely.  However, this will unlikely sway the Fed from its first rate hike since the pandemic first began.

EUR/USD has been trading in a downward sloping channel since May 2021.  After testing and failing to hold below the bottom trendline of the channel in November 2021, the pair traded sideways between 1.1121 and 1.1495, leading to a test a failure of the top trendline in mid-January and mid-February.  On February 10th, the day before the US announced Russia’s intention to invade Ukraine within days, the pair began to move lower as investors moved to the safe haven of the US Dollar.  The pair has been moving lower since. Today EUR/USD is testing the bottom trendline once again, as well as the 161.8% Fibonacci extension from the lows of January 28th to the highs of February 10th.  Also notice the green upward sloping trendline just below today’s daily candlestick, near 1.0800.   This is an upward sloping trendline dating back to January 2017. In addition, the RSI is oversold, near 23.35, an indication the pair may be ready for a bounce.

Source: Tradingview, Stone X

If support on the daily timeframe EUR/USD holds, resistance is at the bottom trendline of the long term channel near 1.0931, then the previous lows at 1.1121.  Above there, price can stretch to the top trendline of the long-term channel, which is near 1.1235.  However, if the long-term support levels can’t hold, horizontal support sits below at 1.0727 and 1.0636 (lows from March 2020).

Source: Tradingview, Stone X

With the ECB meeting and the US CPI both on Thursday, there is potential for volatility in EUR/USD. Throw in headlines from a war that all countries, central banks, and traders now concerned about, and EUR/USD can move rapidly.
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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