After two months of subdued volatility, we are finally seeing more active action in the EURUSD pair. The past week caught many traders wrong-footed and resulted in a complete reversal of the bearish moves two weeks before. The 8-month descending channel has now been broken, ending this bearish leg or potentially the trend itself.

EURUSD is now back near the critical 1.15 technical zone, which currently stands as the key resistance (1.1483 was the high last week). In support of the bullish case, the price has now broken above the 100-day moving average (orange). However, it’s important to note that the 100-week moving average (not shown here) is not yet broken and stands at 1.1497. This and the multiple past highs and lows here in the 1.15 area further highlight its importance. A break above will be significant and likely result in EURUSD reaching the next important technical zone higher which is the 1.17 area.

To the downside, the first modest support is at 1.14. If the price breaks below this zone, EURUSD could reach 1.13, which is the more important support zone in the current context.

While the moves have led to a big correction on the chart, USD bulls may not be ready to capitulate just yet. For instance, Friday’s jobs reports were stellar across the board, with much stronger than forecasted Nonfarm Payrolls, accompanied by higher wage growth and higher participation rate. In addition, there were significant upside NFP revisions for previous months. All of this highlights the strength in the US labor market and is good news for the Fed – a green light if you will –­ for them to hike rates, do QT, and be as hawkish as they want (need).

That being said, it’s important to note that the corrective moves from last week can extend on the back of further position adjustments both in the USD but also in the euro and other currencies. Given those two forces pulling the dollar in different directions, it will be no surprise if the Fx market enters a broad range at this stage (e.g., in major pairs like EURUSD and the dollar index (DXY). 

This week we have the latest CPI release on Thursday. Headline inflation is expected to remain hot above 7.0%, with core CPI forecasted to also nudge higher to 5.9%. Traders will closely watch the actual figures, where hotter numbers could again refuel hawkish Fed expectations, such as a 50bp hike in March and a total of 6-7 hikes this year (implying hikes at every meeting). The USD could receive support under such a scenario, though it’s worth noting that recent upward CPI surprises have not resulted in immediate USD strength (although they certainly did on a longer horizon like over the past 7-8 months).

Fed speakers are scheduled to speak this week (Mester, Bowman), whose comments may add to market volatility and potentially support the dollar via more hawkish Fed pricing.

OK, maybe not as hawkish as other central banks, but ECB Chief Lagarde sounded much less dovish than most anticipated during the press conference, hence the HUGE reaction in EUR pairs. Like Powell the week before, Lagarde did not deny any of the speculations about ending QE earlier or an ECB rate hike later this year. This was the big surprise, and investors who held short EUR positions closed out as a result.

Having said that, it’s worth remembering that the ECB will definitely remain less hawkish than others (BOE, Fed, BOC) because the Eurozone situation is different from these other countries. The EU economy has recovered much slower than peers, inflation is still lower than elsewhere and (importantly) is mainly driven by the rise in energy prices (oil and especially gas). This situation suggests that if energy prices start to fall, the ECB will likely be the first one to abandon any hawkish plans as Eurozone inflation would start falling fast. Hence, from this perspective, it’s questionable how sustainable this EUR rally based on a hawkish ECB can be in the months ahead.

Nonetheless, the ECB’s hawkish shift can fuel some further relief rallies in the euro. It is a big change from a central bank that was widely expected to keep interest rates at 0% throughout this year. Many investors have been short euros, and there is room for a further squeeze in those positions. Breakouts above key technical zones could trigger such position liquidation and could drive the euro even higher in the near term.

This week, the EUR calendar is quiet except for the EU commission economic forecasts, released on Thursday.