Currency Pair of the Week: EUR/USD

Several members of the ECB have indicated that the central bank must intervene in the markets to keep rates low.

EU (1)

The ECB meets on Thursday this week.   As discussed in the Week Ahead, with the recent “unwarranted” rise in yields and inflation expectations, several members of the ECB have indicated that the central bank must intervene in the markets to keep rates low.  Some European countries are still in lockdowns while the vaccine rollout has been slow, as compared to that of the US and UK.  The ECB must manage expectations so as not to let the markets get ahead of themselves.  Under the Pandemic Emergency Purchase Program (PEPP), the ECB can buy up to 1.85 trillion Euros worth of bonds through March 2022.  Many expect them to step up their bond buying under this program.  In addition, they may extend the duration beyond March 2022.  Another option the central bank has is to cut the Deposit Facility Rate below its already ultra-low current level of -0.5%!  Watch for revisions lower in both growth and inflation in ECB members’ forecasts.

Last week, Fed Chairman Jerome Powell indicated that the Fed is currently not concerned about the recent rise in yields and inflation expectations.  They see this as a sign of confidence in pandemic recovery. He also said that the Fed is currently more concerned about the low labor participation rate and the 10 million just still lost from the pandemic. On Friday, NFP data for February showed that 379,000 new jobs were created.  Most of these jobs were in the lower paying hospitality sector.  However, that is where many of the jobs were lost.  As the economy continues to recover, watch for more jobs to come back in this sector.  In addition, this week, the US will hold 3-year, 10-year and 30-year auctions.  Given the week demand for the recent 7-year auction, these auctions will be closely monitored.  Weak demand may send yields and the US dollar higher.  In addition, the $1.9 trillion stimulus package is likely to be passed this week.

EUR/USD broke lower from and ascending wedge in early January 2021.  However, for most of the year, the pair has been trading in a range between 1.2000 and 1.2200.  EUR/USD posted a false breakout of an inverse head and should formation on February 25th and formed a shooting star candlestick.  This is a reversal candle and an indication that price may move lower.  Indeed, the next day the was a long red candle, followed by more long red candles.  On Friday, price broke below the year-to-date lows near 1.1950 and horizontal support dating back to September 2020.  Price is clear to fall to November 4th lows near 1.1602, however it must fall through the 161.8% Fibonacci extension form the lows of February 5th lows to the highs of February 25th, near 1.1784.  Resistance is back at previous support near 1.1920.

Source: Tradingview, City Index

On a 240-minute timeframe, EUR/USD has reached its target of the AB=CD pattern.  The RSI is in oversold conditions, which indicates the pair may be ready for a reversal.  Above the previous mentioned 1.1920 resistance, is horizontal resistance at 1.1990 and then the March 3rd highs at 1.2113. 

Source: Tradingview, City Index

The US auctions on Tuesday, Wednesday, and Thursday, along with the ECB meeting on Thursday, could cause EUR/USD to be volatile this week!

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