Chapter 8 04/24 EURUSD: Bullish Breakout Favors Continued Mid-Term Uptrend
Summary: EURUSD touched the top of its daily trading range after hawkish comments from the National Bank of Belgium's governor Pierre Wunsch, a member of the ECB's Governing Council. The break of the range for the currency favors a continuation of the medium-term uptrend.
Fundamentals
During the Asian session on Monday, the EURUSD fell after failing to test the psychological resistance at 1.1000. The major pair is under selling pressure due to the lack of upside momentum. In addition, the recovery trend of the U.S. dollar also had an impact on the pair.
The U.S. dollar benefited from the U.S. PMI data entering the expansionary territory.
On Friday, the U.S. dollar was further supported by hawkish comments from the St. Louis Fed's James Bullard. He expects the Fed to raise interest rates further as persistent inflation and market fears of a recession have become overdone.
Meanwhile, strong first-quarter earnings data from large U.S. banks suggests that the industry's crisis in March may have passed, further supporting the U.S. dollar.
However, EURUSD traded above 1.1000 as the market entered the European session. The market expects rising interest rates to attract more capital flows into Europe, thus supporting the euro.
According to the Financial Times, Pierre Wunsch, the European Central Bank's executive board member and governor of the National Bank of Belgium, warned that investors have underestimated the rise in borrowing costs in the Eurozone. He insisted that he would only agree to stop raising interest rates if wage growth began to slow.
Wunsch said, "We are waiting for wage growth and core inflation to go down, along with headline inflation, before we can arrive at the point where we can pause." His focus on wage growth raises the bar on the conditions that must be met for the ECB to stop raising rates. "I would not be surprised if we had to go to 4% at some point," he said, indicating that the cost of borrowing could rise more than investors expect.
Investors are betting that the ECB's deposit rate will rise to just above 3.75%. Investors expect the ECB to raise rates more than the Fed and the Bank of England, which are expected to raise rates by 25 basis points next month.
Technical Analysis
Inflation and GDP data set the stage for an exciting week. As markets enter the final week of April, the ECB will send the strongest signals about its decision, especially as the EURUSD tries to stay in the 1.1000 range.
Looking at the daily time frame, a break and close above the April 14 yearly high of 1.1075 would confirm upside momentum to the next key resistance level around 1.1190, where the 200-week SMA is located.
On the other hand, a break below the key oscillator range and an intra-day close below the important lower high point of 1.0830 would call into question the validity of the uptrend. And further declines could extend down to the 1.0775-1.0800 area and reverse the uptrend.
In the 4-hour chart, the pair has started a new uptrend. It is currently well above the 1.0940 level, the 200 SMA, and the 100 SMA.
The bulls are testing the 1.1000 resistance zone and the 50% Fibonacci retracement level of the downtrend from the April 14 high of 1.1075 to the 1.0909 low. A clear breakout to the upside and a close above the 1.1000 resistance level could take the pair to the 1.1035 level.
The next key resistance level is around the 1.1075 area. A clear break of the 1.1075 resistance level by the bulls could push the pair to the 1.1120 area. Any more gains could push the pair to the 1.1200 level.
On the downside, major support is forming around 1.0960. The next major support level is around 1.0920, and a break below it could accelerate the decline. In the above scenario, EURUSD could test the 1.0880 support level. Any more declines could bring the pair back to the 1.0840 support level.
Overall, the direction of the pair is positive, as the current trend is upward and the downward support is quite solid, which favors the bulls. It is recommended to buy the dips.
Trading Recommendations
Trading Direction: Long
Entry Price: 1.1000
Target Price: 1.2250
Stop Loss: 1.0790
Valid Until: 2022-05-08 23:55:00
Support: 1.0960, 1.0920, 1.0840
Resistance: 1.0548, 1.1075, 1.1190
