Bullish view
- Set a buy-stop at 1.0930 and a take-profit at 1.100.
- Add a stop-loss at 1.0850.
- Timeline: 1-2 days.
Bearish view
- Set a sell-stop at 1.0875 and a take-profit at 1.0800.
- Add a stop-loss at 1.0950.
The EUR/USD exchange rate was relatively volatile after the latest flash manufacturing and services PMI numbers from the US and Europe. It initially jumped to a high of 1.0930 and then pulled back as traders wait for the upcoming ECB decision and US economic data.
ECB decision and US GDP data
The latest numbers by S&P Global showed that European manufacturing sector continued to contract in January as companies complained about inflation and supply chain issues. In Europe, the manufacturing PMI rose to 46.6, better than the expected 44.8. Despite the improvement, it remained below 50, meaning that the contraction phase continued.
It was a different story in the US, where the manufacturing sector made some modest improvements. The PMI rose from 47.9 in November to 50.3 in December, higher than the median estimate of 47.9. This number, together with the strong services PMI figure, mean that the US economy is doing well.
The main EUR/USD news will be the first ECB statement of the year. In it, economists expect that the bank will maintain rates at the current level of 4.0%. As such, this headline figure will not move the euro. Instead, the pair will react to the accompanying statement and Christine Lagarde’s press conference.
They will look at these for signs when the bank will start cutting interest rates. In her interview at the World Economic Forum in Davos, Lagarde predicted that the first cut will happen in the second half of the year.
The ECB is in a difficult place because cutting rates too early could spur inflation while maintaining them higher for longer will affect the bloc's recovery.
The other important data to watch will be the US GDP data. Economists polled by Reuters expect the numbers to show that the economy expanded by 2% in Q4 after growing by 5.2% in Q3. That report will cap a relatively strong year for the US as inflation dropped and economic growth continued. The challenge will be how to maintain that growth this year.
A strong report means that the Federal Reserve will have a justification to maintain rates at the present level for longer.
EUR/USD technical analysis
The EUR/USD pair bounced back on Wednesday as it rose from 1.0822 to a high of 1.0932. On the four-hour chart, the pair was hovering at the 61.8% Fibonacci Retracement level and slightly below the 50-period Exponential Moving Average (EMA).
The Average True Range (ATR), a popular volatility indicator, pointed upwards. Therefore, the outlook for the pair is neutral with expectations for volatility because of the ECB decision. The key support and resistance levels to watch will be at 1.0825 and 1.0950, respectively.
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