The Battle for 1.1000 Has Begun. More Rate Hikes Lie Ahead
EUR/USD’s Price Action Turns into a Balancing Act on 1.1000
The euro-dollar pair seems to have settled at 1.1000 for the time being, after reaching a 12-month high of 1.1075, on April 14th. Both the European Central Bank (ECB) and the US Federal Reserve are likely to continue their rate hikes, which will continue to impact the pair’s movement.
Despite the headline inflation in the Eurozone being at its lowest point in 13 months in March, both core and food inflation have reached new record highs. This created mixed opinions among ECB officials
Recently, ECB representative Klaas Knot expressed uncertainty regarding the need for either 50 bps or 25 bps, while Robert Holzmann supported another 50 bps move. Peter Kazimir suggested that the ECB could potentially slow down the pace of its increases.
In the United States, core retail sales have displayed resilience, strong bank earnings have been recorded, and hawkish comments have been made by several Fed officials. This raised expectations for an interest rate hike in May, despite signs of cooling inflation.
According to CME’s FEDWATCH tool, there’s now a roughly 81% chance that the Fed will raise interest rates by 25 bps next month. A week ago the probability was 69%.
Key Data for the Week Ahead
There are only a few releases worth noting this week, which may translate into choppy or sideways price action.
The German ZEW Economic Sentiment is due Tuesday at 9:00 am GMT, showing the opinions of about 300 German professional investors about the 6-month German economic outlook. The release usually has a medium impact.
Eurozone’s Final CPI and Core CPI come out Wednesday at 9:00 am GMT. These versions have the lowest impact because the Flash Estimate and Prelim CPI are released about 15 days earlier.
Friday is PMI day, with a bunch of these indicators being released throughout the day. The German Flash Manufacturing and Flash Services PMIs come out early at 7:30 am GMT, followed at 8:30 am GMT by the same indicators for the United Kingdom. The last batch is scheduled at 1:45 pm GMT: the United States Manufacturing and Services PMIs. The impact of these releases is higher if the actual number differs from the forecast.
Technical Outlook – EUR/USD
The pair is sitting right on the S/R at 1.1000, which acts as a psychological and technical level at the same time. Last week the resistance appeared to be broken but now things are not so clear anymore.
If the bulls cannot take the price above 1.1000 relatively quickly, then we might be dealing with a false break and the pair will probably head toward the middle line of the Bollinger Bands. If we compare the position of the RSI during the two most recent touches of 1.1000, we can see that last time it was higher. Thus we are dealing with a higher high for the price and a lower high for the RSI – aka bearish divergence.
As we’ve seen many times before, divergence is a reliable tool, which more often than not, indicates the true direction of a pair’s movement. If divergence is right this time as well, we will probably see a deeper pullback.
