The EUR/USD exchange rate rose sharply in the new week and could rise further in the future. It will also be at risk of reversing if US inflation becomes more of a “vicious problem” or if the latest interest rate guidance from the central bank comes out. The European (ECB) leaves the market disappointed. For three consecutive trading sessions, the euro/USD is moving upwards, with gains, towards the resistance level of 1.0748, which is stable near it at the time of writing the analysis.
Overall, the single European currency, the euro, benefited significantly on Monday when dollars sold off broadly as a joint statement from the US Treasury Department, Federal Reserve Bank (Fed) and Federal Deposit Insurance Corporation (FDIC) drew a line under previous global market concerns about the banking system. The joint Sunday action rescues all bank depositors while at the same time ensuring that owners and other creditors are released as far as possible after any institutional failures, eliminating key risks that have been such a burden on EUR/USD last week.
For his part, Chris Turner, an analyst at ING, says, “Unless there is a significant rise in US banking stocks today, which indicates that the US authorities have been incredibly successful in putting the risks of the US banking sector back into the bottle, and we can say that the euro / US dollar pair EUR/USD is biased towards the 1.0780 / 1.0800 area, adding in a comment on Monday “This Thursday, the ECB policy meeting will be tough. Presumably, he will have to go ahead with a 50 basis point hike for fear of adding more volatility to the markets.”
Sunday's controls are seen as a short-term boon for the euro, but there will be an equally important impact this week if US inflation becomes more than a "vicious problem" on Tuesday as the fresh increase is likely to choke off EUR/USD. This is a rebound in expectations about US interest rates.
The consensus among economists is for US inflation to fall from 6.4% to 6% for February and for the more important core rate to drop from 5.6% to 5.5% but other price figures released from the US in recent weeks have indicated this. The risk may be to the upside this Tuesday. For her part, Carol Kong, an economist and currency analyst at the Commonwealth Bank of Australia, says: “The US consumer price index for February is the most important economic event in financial markets this week.” "A further increase in core inflation in the eurozone means that ECB communications are likely to remain hawkish which could provide further support for EUR/USD," it adds.
Technical analysis of the EUR/USD:
- The price of the EUR/USD currency pair formed a double bottom on its 4-hour time frame to indicate that a reversal from selling is in progress.
- The price has just breached the neckline resistance to confirm that a rally is imminent.
- The chart pattern extends around 1.0550 to 1.0700, so the resulting uptrend could continue with the same height or 150 pips.
- The price also closes above the 200 SMA dynamic inflection point as additional confirmation of the change in trend.
However, the 100 SMA is still below the 200 SMA to indicate that the general trend is still bearish or there is a chance that selling will resume. Stochastic is already signaling overbought or exhaustion levels among the buyers as well, so a turn lower means that the sellers are taking over. This may lead EUR/USD back to lows at 1.0550, a minor psychological sign. Similarly, the RSI is in the overbought territory to indicate that bullish momentum is slowing and that a return in downward pressure is underway.
However, this pair can mostly take its cues from the fundamentals, as there are top notch catalysts in both the Eurozone and the US.
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