EURUSD: Mid-term Reversal Might Come as No Breakthrough Is Recorded in the Second Bottoming

Forex Market Inflation and Recession Central Bank Policy Trends Economic Trends

Summary:

The initial value of CPI in February in the eurozone was recorded at 8.5%, which was higher than the market expectation of 8.20%. Compared with January, the overall annual inflation may slow down slightly, even if it does exceed expectations, but the main conclusion here is that what we are seeing is the core annual inflation soaring again, which will prove the ECB policymakers' tougher remarks correct.

Buy EURUSD

End Time

CLOSED

1.05700

ENTRY PRICE

1.07500

TGT PRICE

1.04700

SL PRICE

1.08201 +0.00242 +0.22%

Points

Profit

1.04700

SL PRICE

1.05763

CLOSING

1.05700

ENTRY PRICE

1.07500

TGT PRICE

Fundamentals

In February, the CPI of the eurozone slowed down from 8.6% to 8.5%, which was higher than the expected 8.2%. All CPI core items (excluding energy, food, alcohol, and tobacco) rose by 5.3% to 5.6%, higher than the expected 5.3%.

From the major components, the annual growth rate of food, tobacco, and alcohol is the highest, rising by 15% in February and 14.1% in January; Secondly, energy prices rose by 13.7%, compared with 18.9% in January; Non-energy industrial products rose by 6.8%, compared with 6.7% in January; The price of service industry rose by 4.8%, compared with 4.4% in January.

The data showed that affected by the drop in energy prices, the initial annual rate of CPI in the eurozone recorded an 8.5% drop in February, which was less than expected. Meanwhile, the rise in basic prices strengthened the reason for the European Central Bank (ECB) to continue to raise interest rates rapidly. At the same time, it shows that although the overall inflation rate is far lower than the double-digit high in October, it continues to expand, which intensifies people's worries that the energy price surge earlier has penetrated the economy through the so-called second-round effect, making the price rise more difficult to eradicate.

The ECB has promised to raise interest rates by another 50 basis points in March, but grim figures have shifted the debate to subsequent meetings. Investors now expect the ECB's 2.5% deposit rate to rise by a cumulative 100 basis points in March and May before rising to around 4.1% at the start of the year.

The decline in the price from the annual high of 1.0940 appears to have begun to slow as the Relative Strength Index (RSI) of the EURUSD reverses before the oversold zone, and the EURUSD may continue to trade to new weekly highs as the bearish momentum weakens.

However, the eurozone's February CPI update could trigger a bearish reaction in the EURUSD as headline inflation narrows to 8.5% from 8.6% in January, and evidence of easing price pressures could prompt the ECB (board member Philip Lane) to recognize that improvements in energy prices will reduce inflation in the near term, thus adjusting forward-looking guidance on monetary policy.

In turn, the EUR could face resistance before the next ECB meeting on March 16, although the Governing Council is widely expected to raise interest rates by another 50 basis points, the stickiness of potential inflation could force the ECB to adopt stricter policies. For example, Lagarde insists that "we will raise interest rates more if necessary".

That said, stronger-than-expected CPI data could push the EURUSD back in the near term, as it fuels speculation about a eurozone rate hike.

EURUSD: Mid-term Reversal Might Come as No Breakthrough Is Recorded in the Second Bottoming_1

Technical Analysis

EURUSD is struggling with its medium-term uptrend line and is currently blocked by the 20-day SMA. As the RSI continues to move away, the EURUSD is trying to return to the bottom of the range formed on February 27 again, or even lower, forming a second bottoming. This is due to a bearish crossover of the 20-day and 50-day SMAs.

Momentum indicators confirm the recent negative trend. In particular, the MACD extended its bearish structure below the 0-axis, while the RSI turned down again.

Further declines would be supported at 1.0560, followed by the previous low at 1.0532, then the threshold of 1.0480, and the 38.2% Fibonacci retracement of 0.9535 to 1.1030 at 1.0460. A break below this level would reinforce the bearish structure and pave the way to the next key level of the 200-day SMA (at 1.0330).

If the downward structure stabilizes ahead of the Feb. 27 low to form a second bottoming, the bulls are looking for a medium-term rally with short-term targets at 1.0700 and then a renewed challenge to the bearish crossover at 1.0725. A break above that level would shift the outlook to a more neutral level.

Overall, the EURUSD short-term rebound is facing the 20-day SMA suppression and seems to intend to return to the bottom of the range again, forming a second bottoming before moving higher. If the bottom does not break, bulls are expected to see another peak. It is recommended to buy in at the lows.

Trading Recommendations

Trading direction: Long

Entry price: 1.0570

Target price: 1.0750

Stop loss: 1.0470

Deadline: 2022-03-16 23:55:00

Support: 1.0627, 1.0574, 1.0520, 1.0483

Resistance: 1.0704, 1.0723, 1.0782, 1.0803

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Eva Chen

Analyst

Master of Economics, 8 years in the financial industry, CFA holder, joined HSBC (Hong Kong) Bank in 2013 after graduating from the University of California, USA in the Investment Research and Markets Department. With years of financial market experience and trading experience, having provided excellent investment advice to many brokerages, entity derivatives importers and clients in Greater China.

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539

Win Rate

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P/L Ratio

0.58

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WTI, XAUUSD, USDCAD

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EURUSD: Mid-term Reversal Might Come as No Breakthrough Is Recorded in the Second Bottoming

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