01.02.202123:27 Forex Analysis & Reviews: EUR/USD. Trapped sideways: euro to face an important test

The euro-dollar pair held captive of the 100-point price range, within which it has been trading for two weeks. Buyers of EUR/USD cannot approach the borders of the 22nd figure, while the bears do not dare to break the support level of 1.2050. As a result, the pair fluctuates within the 1.2050-1.2160 price range. At the same time, it cannot be said that the pair does not demonstrate volatility - on the contrary, the price movement is impulsive - in a few hours the pair can gain about 50-70 points and lose the same amount by the end of the trading session.

But all these price fluctuations are of a meaningless nature, since traders have been unable to determine the EUR/USD movement vector for several weeks. Indeed, despite the impulsivity, the pair is marking time in the notorious sideways movement. Take a look at the daily or weekly charts - any attack from the bears attracts bulls. And vice versa - any more or less impressive growth is used by traders as an excuse to open short positions. Both opposing sides are sensitive to the current news flow, but at the same time they are waiting for a powerful information driver that would snatch the pair out of the flat.

For example, on Monday morning, EUR/USD traders reacted negatively to the German data. The volume of retail sales in Germany in December decreased by 9.6% (on a monthly basis). This is the weakest result in the last 65 years: the last time the indicator was released at such a low level was in 1956. In annual terms, the indicator also came out in the red zone, slowing to 1.5% (the worst result since April 2020). Such a disappointing release was a cold shower after the strong inflation data that was published in Germany last week. The coronavirus crisis has re-emerged, putting significant pressure on the single currency.

Reacting to the above release, the EUR/USD bears were able to reduce the price by 60 points – to a 5-day low of 1.2069. However, at this point, the downward momentum deflated: buyers once again became more active at the lower border of the price range. The bears tried to take revenge at the beginning of the US session on Monday, but the US ISM manufacturing index, which came out in the red zone, did not allow dollar bulls to show character. As a result, the EUR/USD pair was stuck on the border of 20 and 21 figures again.

Take note that this kind of "push-pull" is due to conflicting fundamental factors - both for the dollar and the euro. The dollar has recently been sensitive to the US stock market, which also demonstrates increased volatility against the backdrop of the corporate reporting season. Last week there was a certain (inverse) correlation: as soon as the major indices swooped down, the dollar was in high demand. And vice versa - as soon as the mood in the stock market improved, the greenback fell under a wave of sales.

The euro, in turn, is subject to pressure from the European Central Bank. Several representatives of the ECB admitted the option of lowering the interest rate on deposits (in particular, Klaas Knot and Martins Kazaks). Fuel was added to the fire by the resonant Bloomberg report that "the markets underestimate the chances of the ECB rate cuts". These messages did not allow EUR/USD bulls to develop the growth trend and settle in the area of the 22nd figure. Nevertheless, the issue of reducing the rate can be considered speculative: there is a lot of talk about it, but none of the influential members of the ECB has yet to support this idea: neither ECB President Christine Lagarde, nor her deputy, nor the chief economist of the ECB, nor the head of the Bundesbank. Moreover, the slightest hints of an improvement in the situation in the eurozone economy are assessed by the market through the prism of the likelihood of a rate cut.

For example, as mentioned above, last week German inflation surprised with rather strong numbers, which became a harbinger of an increase in European inflation. Thus, in monthly terms, the general consumer price index continued its upward trend in January, having risen to 0.8% (against the forecast of growth to 0.4%). A positive trend was also recorded on an annualized basis: the index came out of the negative area and reached 1.0% with the forecast of growth to 0.7%. In response to this release, the EUR/USD pair impulsively jumped and almost reached the middle of the 21st figure. But then the dollar strengthened its position amid fluctuations in the stock market, which is why the sharp attack on growth once again broke down.

On Tuesday, buyers of EUR/USD will have an opportunity to prove themselves again - if the latest macroeconomic reports end up in the green zone. Data on the growth of the European economy in the fourth quarter will be released. The overall forecast is that GDP will contract by 1.4% q/q after a record rise to 12.5%. On an annualized basis, a 6 percent decline is expected, following a 4.3 percent decline in the third quarter.

Recall that the GDP growth rates of Germany, France and Spain that were published last week turned out to be better than expected, despite weak analysts' forecasts. In particular, the German data on GDP for the 4th quarter reflected an increase of 0.1% q/q (with the forecast of a decline to -0.2%). Spain's GDP marginally increased (by 0.4%), while experts were confident in negative dynamics (down to -1.5% q/q). The French indicators nevertheless went into negative territory, but even here the most pessimistic forecasts did not come true: instead of falling to -4% q/q, the indicator fell to -1.3%.

Considering these local results, we can assume that the upcoming release will also be released in the green zone, thereby supporting the euro. Otherwise, market speculation about the ECB's interest rate cut will again be on the agenda.

From a technical point of view, the pair is currently in the area of the lower border of the above price range of 1.2050-1.2160. If, when approaching the support level of 1.2050, the downward momentum fades (which is most likely, given the two-week "bumpiness" in the range), you can consider long positions while initially aiming for 1.2100 (the middle line of the Bollinger Bands on H4) and the main target at 1.2160 (middle line of Bollinger Bands on D1).