EURUSD breaks out of dynamic resistance line following ECB’s hawkish tilt

08 Feb 2022
EURUSD Daily Chart

 

The EURUSD, which was in an 8-month long downtrend, had recently shown signs of recovery by bouncing off 1.112 support level. The US Dollar, widely considered as a safe haven currency, remains largely at the driver’s seat for the currency pair’s movement. However, the recent release of an euro zone economic data has pushed the Euro higher against the greenback.

ECB turns hawkish

Record high inflation in the Euro zone has asserted immense pressure on the European Central Bank (ECB) to revise their initial dovish stance that the high inflation is transitory. The Euro zone’s annual rate of consumer-price inflation rose to 5.1% in January 2022, outpacing the market’s expectation of only 4.4%. While the ECB kept its policy unchanged, ECB president Christine Lagarde displayed a hawkish tone by hinting it could accelerate its withdrawal of stimulus soon.

As one of the world’s most dovish central bank, the ECB has finally acknowledged the mounting inflation risks and now sees the possibility of an interest rate increase this year. This hawkish turn will be a bullish driver for the euro.

Healthy economic data continues to back the US Dollar

Upbeat employment data released by the US Bureau of Labor Statistics last Friday provided headwinds for the EURUSD to rise further. US Labor Force Participation Rate increased to 62.2% in January, higher than the forecasted and previous month’s data at 61.8% and 61.9% respectively. Moreover, the Nonfarm Payrolls for January came in at 467K, beating market consensus of 150K.

Rapidly rising wages as indicated by the average hourly earnings that jumped 5.7% over last year has cemented the market’s expectation of a hawkish Fed. Bank of America (BofA) Chief Economist Ethan Harris expects the Fed to raise rates by 0.25% at every remaining meeting this year for a total of seven hikes, with four more hikes in 2023. He projects the termination rate to be 2.75-3% by the end of 2023, which should slow down growth and inflation.

Technical Analysis

After reaching the lowest point, since June 2020, at 1.1121 on 28th Jan 2022, EURUSD displayed strong bullish momentum and advanced more than 300 pips in 6 days to break above a dynamic resistance line that stretches back to May 2021. A bullish divergence that validates a bullish trend reversal is observed on the Relative Strength Index (RSI) where prices created a lower low while RSI reading scores a higher high. The RSI also clawed its way into the bullish region of above 50 and is currently hovering at around 60.

Looking ahead, we anticipate the pair to retrace and retest the dynamic resistance-turned-support line around S1. If the retest is successful and prices rebounds, we set our price target at R1 around 1.1485 and R2 at 1.1616 in extension.

Tuesday, February 8

USD – Goods and Services Trade Balance (Dec)

Wednesday, February 9

EUR – Germany Trade Balance s.a. (Dec)

Thursday, February 10

EUR – European Commission releases Economic Growth Forecasts

USD – Consumer Price Index (MoM)(YoY)(Jan), Consumer Price Index Core s.a(Jan), Consumer price index ex Food & Energy (MoM)(YoY)(Jan), Initial Jobless Claims (Feb 4)

Friday, February 11

USD – Monthly Budget Statement (Jan), Michigan Consumer Sentiment Index (Feb)

EUR – Harmonized Index of Consumer Prices (YoY)(Jan)


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