EUR/USD. Christmas Calm and Growth Prospects

[Ben Graham]

The pre-New Year period in the currency market is typically characterized by two opposing states: either an impassive flat or abnormal volatility. This year, EUR/USD traders have been active: over the last three days, the pair has risen by more than 100 pips and even set a three-month high, reaching 1.1809. A "thin" market is particularly sensitive, provoking abnormal price fluctuations, but in this case, the upward dynamics are not due to this factor. It can be said that the pair is behaving "normally," and objective fundamental reasons explain the price increase.

The EUR/USD pair ended Wednesday at 1.1779, reflecting the buyers' inability to settle above the target of 1.1800, although to confirm the upward trend, they need not only to overcome but also to consolidate above the resistance level of 1.1810 (the upper Bollinger Bands line on both the daily and weekly charts). Sellers took the initiative but could not even approach the intermediate support level of 1.1760, which corresponds to the middle line of the Bollinger Bands indicator on the four-hour chart. After updating the intraday low to 1.1773, the pair drifted, reflecting indecision among both bulls and bears in EUR/USD.

The immediate reason for the correction was the publication of the Unemployment Claims report. Against the backdrop of a nearly empty economic calendar, this report was the only significant release of Wednesday. The figure came in the green zone, slightly below the forecast. However, the context is important here.

At the beginning of December, this indicator fell sharply, reflecting a 191,000 increase in initial jobless claims. This dynamic was contradictory. On the one hand, Unemployment Claims dropped to an almost eight-month low, below the 200,000 mark for the first time since April. On the other hand, this result could not be called "clean," as the reporting week was short (with Thanksgiving on Thursday and a shortened workday on Friday). Therefore, market participants were skeptical about such an abnormally strong result. And they were right: the following week reflected a 237,000 increase in the indicator (the highest value since early September). The next two weeks needed to show which way the balance would tip—either toward further increases or toward further decreases in the indicator.

Last week, Unemployment Claims dropped to 224,000, and on Wednesday, the indicator came in at 214,000. Thus, in this case, we can talk about the formation of a downward trend. The dollar reacted positively to this fact (especially against the backdrop of a nearly empty economic calendar), recovering some of its lost positions.

Still, bullish sentiment dominates the EUR/USD pair. Looking at the MN timeframe, we will see that the price has been within an upward trend for the second consecutive month. The main reason is the divergence in monetary policy between the Federal Reserve and the European Central Bank. While the ECB has taken a wait-and-see stance, the U.S. Fed has begun easing monetary policy. To date, traders anticipate another round of easing at the beginning of next year, specifically at the March meeting.

As for the ECB, "moderately hawkish" sentiments are in the air. Ahead of the December meeting, rumors circulated in the market that the central bank might consider raising interest rates within the next year. Such rumors were not without basis: appropriate signals were issued by ECB Governing Council member Isabel Schnabel. According to her, the next step for the central bank could be to raise interest rates, given the recovery of the eurozone economy, the expansion of fiscal policy, and the stagnation of the core CPI index.

However, following the December meeting, ECB President Christine Lagarde took a more cautious stance. At the concluding press conference, she stated that market speculation about interest rate hikes is "unfounded." At the same time, Lagarde made it clear that the baseline scenario for the central bank is to maintain a wait-and-see position.

Thus, the divergence between ECB and Fed rates is a key factor in the EUR/USD pair's growth. U.S. macro data are evaluated through the prism of this factor, either strengthening or weakening the dovish sentiment. For example, the block of macroeconomic data published on Tuesday was interpreted by the market unfavorably for the greenback, despite a 4.3% growth in U.S. GDP. The contradictory structure of this report (a significant contribution from inventories, an increase in government spending, and modest growth in Core PCE), along with the "red tint" of other macroeconomic reports (consumer confidence index, Durable Goods Orders, and manufacturing output), disappointed dollar bulls, leading to pressure on the greenback.

That is why sellers of EUR/USD were only able to organize a modest correction in response to the publication of Unemployment Claims. It is also why downward pullbacks are advisable to use as a reason for opening long positions.

Technically, the pair is located between the middle and upper Bollinger Bands lines on the daily chart, as well as above all lines of the Ichimoku indicator, which shows a bullish "Parade of Lines" signal. The main target is the resistance level at 1.1810 (the upper Bollinger Bands line on both the daily and weekly charts). If buyers overcome this target and consolidate above it, the next target for the upward movement will be the 1.1950 mark (the upper Bollinger Bands line on the MN timeframe).

The material has been provided by InstaForex Company - www.instaforex.com