EURUSD has finally broken that bear flag pattern to the downside, much as we anticipated in our recent weekly Fx posts. The main focus is now shifting to 1.10 as the next significant support down and the target zone for bears.

The 1.10 zone is a key support due to several factors:

• Major psychological and historical price level of importance
• Was the resistance of a tight range in April/May 2020, following the wild Covid-induced gyrations
• 78.2% Fib retracement from the entire 2021 rally

Of course, if the bear trend accelerates enough, the price could push beyond 1.10. In this case, the next support will be at the 1.08 zone.

Resistance to the upside on the weekly chart is hard to find nearby. The first important resistance remains at the 1.15 area, with the 1.17 area being the next one higher.

It is another event-filled week in the Fx market, so we better prepare for active trading. This may include quiet sessions, followed by bursts of volatility on any surprises in the actual data and central bank meetings.

The dollar rallied powerfully last week, following the markets’ hawkish takeaway from the Fed meeting. The absence of strong pushback by Chair Powell against commencing QT or delivering a (double) 0.5% rate hike in March was the key reason for the perceived hawkishness. Essentially, the Fed has said anything is possible, and as long as the inflation and employment data justify it, they will not hesitate to tighten policy forcefully. This was all the market needed to take the USD higher.

The US calendar for this week is jam-packed again. The key reports are the ISM surveys on manufacturing (Tue) and services (Thur), followed by the most watched report of all, the Nonfarm payrolls on Friday.

Considering the busy calendar and the hefty appreciation last week, it seems probable that the USD can consolidate somewhat, particularly in the first days this week. Watch out for fake moves as all could be part of the noise, driven by volatility surrounding the high-impact events.

Once the dust settles, however, the dollar can easily extend the gains from last week, especially if US economic data is robust. Moreover, where other currencies will be moving will also be very important for the USD this week, given their own central bank meetings and key economic reports on the calendar (see below).

The EUR remains among the weaker currencies, held down by a dovish central bank and slower economic growth compared to other currencies. Last week’s PMI data largely confirmed this narrative, and CPI inflation should do the same this week.

There are CPI reports from key Eurozone countries today (Mon) and tomorrow (Tue), followed by the CPI print for the whole Eurozone on Wednesday. A drop from the previous month is expected due to fading base effects, although high energy prices could keep inflation elevated for longer in the Eurozone too. 

The ECB meeting will come on Thursday. Everyone is expecting them to be dovish and they most likely will as they have no reasons to change stance, as discussed above. Thus, traders’ focus will be on the communication for the future policy path and on President Lagarde’s presser. In this regard, some words may trigger volatility, but other than that, expect an all-around quiet meeting with a minor impact on EUR.

With the potential for more volatile trading this week, it’s reasonable to expect some consolidation or retracement for the euro. There are also some positive developments on the political front, such as Italy re-electing Mattarella for President with Draghi remaining Prime Minister (seen as the best case scenario for EUR). Also, the Ukraine-Russia tensions are contained so far and not escalating, with diplomacy remaining the main choice for all sides.

Nonetheless, besides some short-term relief, politics are unlikely to stop the EUR downtrend from extending. The firmly dovish ECB stance should keep the euro pressured in the weeks ahead, as most other central banks are already hiking rates or preparing to do so.