Bulls are caped, or can continue the way?
Market analyst – IFC Markets
Last week the Euro was the star of the week with great gain above 1.1480. The main reason was the Mrs. Lagarde press conference right after the announcement, where she did not mention that ECB will not increase the rates in 2022, as she used to do and repeat it always. This reaction of Mrs. Lagarde increased the possibility of the earlier rate hike in May by ECB and lifted the Euro against its crosses.
As the latest data showed that the Eurozone inflation rate exceeded the ECB target for the seventh consecutive month, and last seen was at 5.1%. We can see the effects of higher inflation and inflation expectations on Eurozone bond yields to increase to multi-year highs. German 5-year bond yields seen at the highest rate since March 2018, and 10-year bond yields increased above the highest rates since January 2019 at 0.267%. Italian bonds yields are also the same, the 5-year bond yields have been above 1% since June 2020, while 10-year bonds Yields rose as high as 1.9% earlier today.
In short, we can say that markets now pricing on more and faster rate hikes, and inflation is still expected to increase, therefore yields can continue to rise. Currencies relation now will depend on bond yields and Banks' rates in different countries and economies, as carry trade can be more effective, especially during uncertain market situations.
Euro started to ease yesterday after that Lagarde in the EU Parliament mentioned that any hawkish policy will be slow and calculated. Thursday, we will have the US inflation data and since market participants are waiting for higher numbers, it can lift the US dollar rate as well. On the published data front, EU data was not as good as expected, while the US December Goods Trade Balance was much more optimistic. US trade balance has seen at $101.4 billion, while the Goods and Services Trade Balance printed at $-80.73 billion, better than anticipated.
From the technical point of view, EURUSD still has a side movement with no specific direction. None of the technical indicators and market volume, also for now have enough strong signal to count on that. On the other hand, in the short and mid-term charts, we can see more bearish interest with a lower than zero level of MACD histograms, and price moving under main MA lines. In its downtrend, a breakthrough in the daily low should encourage the bears toward the 1.1300 regions. Further declines could extend towards 1.1260, which is the 61.8% retracement of the mentioned downtrend.