ECB vs Fed Continues Next Week, EUR/USD Seeks Breakout

EUR/USD ANALYSIS

• All eyes on U.S. economic data and ECB speak.
• Bullish impetus fading for euro?

EURO FUNDAMENTAL FORECAST: MIXED

The euro ended last week strongly pushing ever closer to the 1.09 resistance handle. In what has been a battle between central bank speakers to maintain their credibility and persist with a very hawkish narrative, the European Central Bank (ECB) is currently leading the way versus the Federal Reserve. Markets are almost looking through Fed speak concerning pushing the 2023 terminal rate up to the 5% mark by focusing on deteriorating economic data out of the U.S.. That being said, it may be foolish to do so with so many Fed officials presenting a united front about truly bringing down inflation to its target level.

EUR support has largely been driven by the dollar sell-off but rising inflation in the eurozone and a firm stance by ECB President Christine Lagarde to fight inflation. She expressed concerns over China’s re-opening contributing to higher energy prices in 2023 and the ECB will look to persist with interest rate hikes to bring inflation down to 2%. This quickly dismissed any dovish talk floating around and could be reiterated this week with Lagarde and other ECB officials scheduled to speak. There is a risk of hiking to aggressively could hurt the region with recessionary fears rife but as it stands, it is almost certain that February’s rate decision will result in a 50bps increment – refer to money market pricing below.

ECB INTEREST RATE PROBABILTIEIS

Source: Refinitiv

The week ahead (see below) looks skewed towards the U.S. but German data is a great barometer for the eurozone and could prop up EZ optimism should actual data follow expectations. On the U.S. side, softer data would truly pressurize Fed hawks and likely lead to a leg lower for the greenback. Durable goods orders are almost certainly going to be higher with Boeing obtaining a large influx of orders while GDP is set to show an expansion for Q4 2022. Core PCE will be under the microscope as well for signs of further inflationary softening. Michigan consumer sentiment wraps up data for the week and estimates show a marked increase in consumer confidence that could weigh on EUR/USD if realized.

EUR/USD ECONOMIC CALENDAR

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

EUR/USD DAILY CHART

Chart prepared by Warren Venketas, IG

Daily EUR/USD price action exhibits yet another consolidatory rectangle pattern (pink) indicative of market indecision but a breakout is looming. Next week’s data could catalyze this move and a daily candle close above or below rectangle resistance/support may lead to some short-term directional bias. Considering the fact that the euro is close to overbought levels, I do not see much more in the way of significant upside (if any) in the near term and could come swiftly lower even if bulls push the pair up towards 1.1000.

Resistance levels:

Support levels:

IG CLIENT SENTIMENT DATA: CAUTIOUS

IGCS shows retail traders are currently SHORT on EUR/USD, with 67% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment; however, due to recent changes in long and short positioning we arrive at a short-term mixed disposition.

Contact and followWarrenon Twitter:@WVenketas