"Head and Shoulders" Pattern Still Works

Central Bank

Forex

Summary:

Markets are now focused on waiting for a piece of Eurozone inflation data and a decision from the (FOMC) meeting. European Central Bank (ECB) President Christine Lagarde emphasized that the central bank is not yet ready to initiate a rate cut, stressing the need for a thorough data analysis.

SELL EURUSD

EXP

EXPIRED

1.09450

Entry Price

1.06280

1.10400

1.16522 +0.00096 +0.08%

Pips

EXPIRED

1.06280

1.07224

Exit Price

1.09450

Entry Price

1.10400

Fundamentals

In an interview with CNN, ECB President Christine Lagarde said, "We are not ready to initiate that step of cutting rates," adding that the decision to loosen monetary policy would depend on "a variety of data." She also noted that the importance of wage data is "crucial".

Despite recognizing the clear deflationary trend, Lagarde noted that the ECB needs to go deeper and gain insight into the trend to make informed decisions. "There is no doubt that we are in a deflationary trend," she confirmed, "but we need to take this process further."

Lagarde's speech also mentioned the consensus within the ECB on the direction of the next policy move. She said, "I think we all agree that the next move" will be a rate cut, which is in line with the general expectation of an eventual rate cut. However, the exact timing remains uncertain and will require a thorough review of upcoming economic data releases.

A key factor in the rate cut timetable is the availability of wage growth data, which is not expected until after the ECB's April meeting. This makes the June meeting a more likely time to consider a rate cut.

At the same time, Vujcic, a member of the ECB's Governing Council, emphasized that a "smooth transition" in monetary policy is more important than the timing of the first rate cut. In addition, he prefers to move forward at a smaller pace.

"April or June doesn't have much of an impact on the economy," he said, "and I think it's more important that we achieve a kind of smooth transition."

Vujcic also expressed a preference for gradual rate adjustments, favoring 25 basis point adjustments over larger ones. In addition, there would be some "pause" between each rate change.

Regarding the economy, Vujcic said that "the risk of a recession in the euro area is getting smaller" and that the upcoming phase is expected to be characterized by moderate economic growth and further deflation.

MARKET WATCH: The ECB is expected to leave interest rates unchanged at its first meeting of the year. Labor shortages and the impact of wages on inflation appear to be another challenge for the ECB. Negotiations to raise wages could still force firms to pass on increased labor costs to consumers. However, ECB members may not have access to new wage data before the April meeting; therefore, the June meeting may be the best time to decide if a rate cut is necessary. Of course, if inflation begins to fall sharply more than expected and financial conditions deteriorate, the ECB will not wait that long to cut borrowing costs.

The market is now focused on waiting for a piece of Eurozone inflation data. Despite the ECB showing a preference for a summer rate cut, any data surprises could still impact their outlook, with weaker-than-expected inflation data likely to push the EURUSD up to the 1.0875 range.

The EURUSD could see significant downward pressure if the Fed delays signaling a rate cut. In this case, the price could fall towards the December support zone of 1.0780-1.0743 range.

"Head and Shoulders" Pattern Still Works_1

Technical Analysis

The EURUSD remains biased to the downside in Wednesday's trading. The consolidation from 1.1138 down to the first support level of 1.0722 is still in progress. This is also where the "head and shoulders" pattern still works. A decisive break below the range consolidation would indicate that the overall rise since 1.0447 is complete and target that low.

However, on the bright side, to realize that a break above 1.0932 would turn the bias back to the upside for a stronger rebound, the bulls would first need to accelerate the break above the bearish channel at 1.0860 and break above the 1.0880 resistance area, especially if the Fed provides more details about the delay in the timing of the first rate cut.

From a broader perspective, the trend from 1.1274 is seen as a corrective pattern rising from 0.9534 (2022 low). The rise from 1.0447 is seen as the second wave of the trend. While a further rebound cannot be ruled out, the upside should be limited by 1.1274 to bring about a third wave of the trend of the pattern. At the same time, a sustained break of the 1.0722 support level would indicate that the third wave trend has started at 1.0447 and below. It is recommended to go short at the highs.

Trading Recommendations

Trading direction: Short

Entry price: 1.0945

Target price: 1.0628

Stop loss: 1.1040

Deadline: 2024-02-14 23:55:00

Support: 1.0795, 1.0723, 1.0702

Resistance: 1.0886, 1.0932, 1.0965

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