Following the robust Non-Farm Payrolls (NFP) report from the US last week, the US dollar has regained its strength as the market recalibrates its expectations for the timeline of potential Federal Reserve interest rate cuts. This adjustment has prompted a retracement in the EURUSD currency pair, which continues to exhibit a bullish pattern leading into a pivotal week.
On Tuesday, the Eurozone surprised the market by reporting an unemployment rate of 6.4%, contrary to the anticipated unchanged rate of 6.5%. Despite this, the market’s response was subdued, with all eyes eagerly fixed on Thursday’s US Consumer Price Index (CPI) report. The outcome of this report has the potential to reshape market expectations regarding the likelihood of a rate cut by March, a probability currently standing at 60%, as indicated by the CME FedWatch Tool. Investors are poised for a dynamic week, ready to navigate potential shifts in currency markets based on the upcoming economic data.
Technical
On the 1D chart, an ascending channel has formed as the currency pair retraced most of the downtrend that bottomed out in early October. The 25-SMA (green line) underpins the expansion within the channel at 1.0937, while the 61.8% Fibonacci golden ratio offers resistance at 1.0958, creating a narrow trading range in the Tuesday session.
If the currency pair falls below the 25-SMA, the dynamic support of the channel could be at risk of a breakdown, which brings the 50-SMA (blue line) support into play close to the Fibonacci midpoint of 1.0861. To sustainably break down the channel, the price action may need to clear this hurdle, which could open a path for convergence with the 100-SMA (orange line) at 1.0736 in the longer term.
Conversely, any movement above 1.0958 could take some risk of a breakdown off the table while bringing resistance at 1.1018 into the spotlight. If the channel formation holds firm, the price action could ride the bullish wave toward 1.1121 in the upcoming sessions.
Summary
While recent strength in the US dollar enforced a pullback in the EURUSD currency pair, the bullish channel remains in play, underpinned by support at the 25-SMA. Trading ranges may be low leading up to Thursday’s inflation report, which could be a catalyst for further directional price action.
Sources: Koyfin, Tradingview, Reuters
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
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