Currency Pair of the Week: EUR/USD

The pair started on a positive note thanks for Spain’s Harmonized CPI, which came in at +5.8 YoY vs 4.7% YoY expected and +5.5% YoY last. Today, Markets will get a look at CPI from France and Germany, ahead of the Eurozone January Preliminary CPI tomorrow. Expectations are for a print of the headline CPI to drop to 9% YoY from 9.2% YoY in December. The Core rate is expected to drop to 5.1% YoY from 5.2% YoY in December. Expectations are for 50bps rate hike, which would bring the key rate to 3.00%. Many members of the committee, including ECB President Christine Lagarde, have already indicated that a 50bps hike is a done deal. Anything different will disappoint the markets. But traders will be watching for signals that another 50 bps rate hike is in the cards for March.

Last week, the US released one of the Fed’s favorite measures of inflation, the Core PCE Price Index. The print was 4.4% YoY, as expected, vs a prior reading of 4.7% YoY. Today, the US will release another important gauge of inflation which the Fed relies heavily on: The Q4 Employment Cost Index. Expectations are for an increase of 1.1% vs a Q3 reading of 1.2%. How will these prints affect the FOMC when it meets tomorrow ? The markets are already pricing in a 99% chance of a 25bps hike, which would bring the Fed Funds rate to 4.75%.

On a daily timeframe, EUR/USD has been moving in an orderly upward sloping channel since the end of November 2022, When price made a near-term low of 1.0223. However, since January 12th, when the pair reached 1.0852, price has been fairly tight, trading near the top trendline of the channel. Since January 18th, the pair has been trading in an ascending wedge with a low of 1.0766 and a high of 1.0930. On Friday, price dipped below the bottom trendline of the wedge but moved back inside it on Monday.

On a 4 hour chart, EUR/USD is moving lower once again out of the ascending wedge. If price continues to move lower, first support is at the low from January 27th at 1.0838. Below there, price can fall to the bottom of the ascending wedge at 1.0766 then horizontal support at 1.0713. However, if price does move back into the wedge, there is a band of resistance at a horizontal trendline dating to April 22nd, 2022, the top trendline of the channel, and the top trendline of the ascending wedge. These all cross between 1.0936 and 1.0966. Above there, price can move all the way back up to the highs from March 31st, 2022 at 1.1185.