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EUR/USD. This week’s preview: ZEW, Lagarde, and FRS “silence” mode

Relevance up to 08:00 2022-01-18 UTC+00

The EUR/USD pair is trading in a narrow price range at the start of the trading week after Friday’s decline to the bottom of the 1.14 area. Traders ignored the release of China’s macroeconomic data, which mostly came out in the “green zone”, reflecting the recovery of the world’s largest economy. In particular, China’s GDP growth rates reached a 10-year high last year. The indicator came out at around 8.1% with a growth forecast of 6.2%. In addition, agriculture showed an annual growth of 7.1%, industry and construction rose by 8.2%, and the service sector also did so by 8.2%.

However, the US dollar did not react to this release. Traders took a wait-and-see attitude after the US dollar’s strengthening last Friday. Next week, the main event of the month will take place – the Fed’s January meeting, which will determine the direction of the movement of the US currency. Two options are possible before this event: either the pair will hang in a flat, or the US dollar will begin to be in high demand, in accordance with the trading principle “buy on rumors, sell on facts”. There are all prerequisites for the implementation of the second scenario, given the rhetoric of the overwhelming majority of the Fed representatives. In turn, an alternative scenario (the resumption of growth) looks unlikely. In the wake of the weakening US dollar, EUR/USD buyers failed to enter the area of 1.15. This hesitation allowed the sellers to take control. Now, the bears need an additional information impulse to return the pair to the range of 1.1260-1.1360, within which it has been trading for six weeks.

The US trading floors are closed today in celebration of Martin Luther King Day. The economic calendar is also not full of events during the European session.

Nevertheless, reports from the ZEW Institute will be published in Germany tomorrow. The German business sentiment index has been declining for four months (from June to October), showed positive dynamics in November (growth to 31 points), and plummeted again to 29 points in December. This month, positive dynamics are expected – the index should rise to 33 points. The pan-European indicator shows a similar trajectory. The January result should reflect the growing optimism of the business community. Otherwise, the euro will be under background pressure.

On Wednesday, the final data on the growth of German inflation in December will be released, but it is unlikely to provoke volatility. This will be followed by the US real estate data during the US session, where the volume of building permits issued will be known. This indicator is secondary, but it can affect the pair in case of strong fluctuations. A decline from 3.4% to 0.4% is expected.

On Thursday, the minutes of the ECB’s last meeting will be published during the European session. This release may put pressure on the European currency. It is worth noting that despite the record inflation growth, ECB members showed passive-waiting behavior at the December meeting. Moreover, the regulator “strengthened” the APP program, which will operate with an open completion date. The minutes of this meeting may reflect the dominance of “dovish” sentiments in the Central Bank’s camp.

And finally, on Friday, all the attention of the pair’s traders will shift to the speech of the ECB President, Christine Lagarde, who will take part in a forum called “Prospects for the World Economy.” She is expected to repeat her position once again: 1) inflation growth in the euro area is temporary; 2) uncertainty remains about the pace of economic recovery; 3) the ECB’s soft monetary policy is justified by objective circumstances. In other words, Lagarde’s rhetoric could also put pressure on the euro.

It can be seen that this week’s economic calendar is not full of events. Fed members are on a 10-day “silence mode” before the January meeting, and macroeconomic reports have either been published in early January or will be published next week. Therefore, the EUR/USD pair will either fluctuate in flat, reflexively reacting to the above releases, or the US dollar will gradually begin to gain impulse amid the “hawkish” mood of the majority of the Fed representatives. It can be recalled that for the last two weeks, many of them have stated their position – Powell, Brainard, Williams, Daly, Bostic, George, Barkin, Harker, and Bullard. Almost all of them agreed that the first rate increase should take place at the March meeting. As for the further prospects for tightening monetary policy, many have retained the intrigue, avoiding a direct answer. Despite this, some Fed officials (in particular, Bostic) reported that they expect three or four increases within the current year.

Such a disposition of the Fed should stir up interest in the US currency. Meanwhile, the euro has no “allies” or support as the ECB’s minutes and Lagarde’s speech will put pressure on the Euro currency.

In general, the US dollar is believed to still have the potential to rise. An indecisive Powell confused many market participants while speaking in the Senate, after which the US dollar plunged across the market, despite record inflation in the US and the noticeable hawkish stance of other Fed representatives. Therefore, any upward surges can still be used as an excuse to open short positions. The first target is the level of 1.1380 (the Tenkan-sen line on the D1 timeframe) and the main target is 1.1340 (the lower border of the Kumo cloud, coinciding with the middle line of the Bollinger Bands indicator on the same timeframe).

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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