EUR/USD Analysis

• FOMC minutes boost USD.
• German CPI beats estimates.
• Central bank divergence remains.
• Technical pattern could lead to further EUR/USD downside.

Euro Fundamental Backdrop

The euro kicked off 2022 on the back foot, which extended yesterday after the Fed’s hawkish rhetoric was heightened in the December FOMC minutes. Key talking points from the minutes include:

• Rapid rate hikes.
• Reduction in bloated balance sheet.
• Omicron indifference.

EUR/USD Economic Calendar

German CPI (see calendar below) hit 5.3% for the December period, beating both forecasts as well as the previous print. Initial reactions were slightly bullish but relatively muted because of the well-articulated guidance on rate hikes and tapering by the ECB in December 2021.

Today, the ISM Non-Manufacturing PMI (DEC) release is due and could hold more significant insights into the U.S. economy than the smaller manufacturing sector. Services holds more sway over the U.S. dollar and in particular, employment and price metrics (inflation).

Tomorrow’s NFP data should bring about some currency volatility pre- and post-announcement and may result in significant price fluctuation should the print follow in the footsteps of yesterday’s ADP numbers – although the relationship between the two is tenuous at best.

Source: DailyFX Economic Calendar

EUR/USD Technical Analysis: Daily Chart

Chart prepared by Warren Venketas, IG

Technically, daily EUR/USD price action reflects a consolidatory pattern since late November 2021. The pattern resembles that of a rising wedge or bear flag, which are traditionally bearish continuation patterns. Should prices break below the wedge/flag support (yellow), this will open up further downside towards subsequent support levels.

Momentum remains bearish with prices trading below all three EMA levels and with the Relative Strength Index (RSI) reading slightly below 50. Resistance levels:

• 1.1500.
• 1.1400.

Support levels:

• Wedge/flag support.
• 1.1186 (November swing low).

IG Client Sentiment Data Points to Short-Term Upside

IGCS shows retail traders are currently distinctly long on EUR/USD, with 59% of traders currently holding long positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment and the fact traders are net-long is suggestive of a bearish inclination. However, the recent net changes in longs and shorts point to a bullish bias.

EUR/USD Sentiment: Mixed. Data provided by IG. 60% of clients are net long.