The upcoming trading week promises to be volatile, especially in the second half of the week, when key economic reports will be published and the results of the European Central Bank's January meeting will be announced. These events will help EUR/USD traders determine the price's direction: either the pair returns to the 1.0930-1.1050 range, or it falls to the 1.0730 level (the lower boundary of the Kumo cloud).
Monday
The economic calendar for Monday is traditionally somewhat empty. European Central Bank President Christine Lagarde will speak in Germany. However, this is unlikely to significantly impact the dynamics of the EUR/USD pair. The nature of the event suggests that Lagarde will not touch on core topics.
During the U.S. session, the Leading Economic Index will be published, which includes 10 components (from consumer expectations to building permits issued). However, this indicator typically has a weak influence on the market.
Tuesday
There are hardly any important events on Tuesday either. The eurozone consumer confidence index could be quite interesting, and it is expected to come in at -14 points. On one hand, the indicator will remain in negative territory. On the other hand, the forecasted result is the best since February 2022. The index has shown positive results since November, and it may continue to show the same trend in January.
The Richmond Fed Manufacturing Index will be published on Tuesday. The index was above zero in September and October, but then it fell back into negative territory. According to forecasts, the index will remain below zero, at -7 points, in January.
Wednesday
EUR/USD traders will focus on the Purchasing Managers' Index (PMI) data. According to preliminary forecasts, the indicators will reflect positive dynamics but will still remain in the contraction area, below the key 50-point mark. For instance, Germany's Services Business Activity Index is expected to come in at 49.6 (compared to 49.1 in December). In the manufacturing sector, the index has shown consistent growth for the fifth consecutive month, reaching 43.3 points in December. It is also expected to rise in January to 43.7. As you can see, despite the positive trend, the index is still far from the 50-point threshold. A similar situation has developed in France and across the eurozone.
The U.S. Manufacturing PMI will be released during the U.S. session. This indicator was at 50.0 in October, but then it started to decline, reaching 49.4 points in November and 47.9 points in December. Forecasts also show a negative trend in January, with the indicator projected to be at 47.1. This is the lowest value for the index since June 2023. The U.S. Services PMI is also expected to disappoint the dollar bulls: after three months of consecutive growth, the indicator will decrease to 50.8 (compared to 51.4 in December). Such a result could put pressure on the U.S. currency.
Thursday
The outcome of the ECB's January meeting will be announced on January 25. On one hand, the formal results of this meeting are predetermined: the central bank will keep all parameters of monetary policy unchanged. On the other hand, there is still intrigue regarding future prospects. Over the past two weeks, many ECB officials have adopted a more hawkish stance. They have dismissed rumors that the central bank may start lowering interest rates as early as April, saying that markets are getting ahead of themselves. However, ECB members have not been able to provide any specific timelines. Some ECB officials advocate using the dynamics of key indicators (primarily inflation) as a guide, while others suggest monetary easing could happen in the summer (as mentioned by Lagarde last week). But we have heard more radical views: for instance, the head of the Austrian central bank, Robert Holzmann, even said that rate cuts in 2024 aren't guaranteed
It's important to note that inflation will likely rise in the coming months due to tax increases and subsidy reductions in the eurozone countries. In December, inflation in the eurozone accelerated to 2.9%, despite consistently decreasing consumer price indices over the previous seven months. In addition, inflation figures in Germany and France have also risen.
Considering this preceding fundamental background, one might speculate that the outcomes of the ECB's January meeting will work in favor of the euro.
In addition, preliminary data on fourth quarter GDP will be published. According to forecasts, the U.S. GDP is expected to increase by just 2.0%, following a growth rate of 4.9% in the third quarter of the previous year. The GDP price index is projected to come in at 2.2%, down from 3.3%. The forecast is relatively weak, but if these indicators also end up in the "red," the greenback could come under significant pressure.
Friday
On Friday, the dollar will face another test: the value of the core PCE price index will be announced. As is known, this is a crucial inflation indicator closely monitored by Fed officials. According to preliminary forecasts, the core PCE price index in year-on-year terms is expected to decrease to 3.0% (the lowest level since March 2021). After reaching 4.3% in July, this indicator sharply declined to 3.8% in August, then further decreased to 3.7% in September, 3.5% in October, and 3.2% in November. If the index is in line with the forecast in December, it will exert moderate pressure on the U.S. currency. However, if the indicator falls into the "red" (below the 3% mark), the greenback could be knocked down again, providing the bulls with another reason to launch an attack.
Conclusions
We are in for an interesting and volatile week. Based on preliminary forecasts and scenarios, the bulls may benefit from upcoming events, thanks to the ECB's hawkish stance, weak U.S. GDP growth, and a decline in the PCE benchmark index.
However, it is advisable to open longs only after the pair consolidates above the resistance level of 1.0930 (Tenkan-sen line on the same timeframe). In this case, we can expect the pair to rise to 1.0960 (Kijun-sen line) and eventually to 1.1050 (upper Bollinger Bands line on the daily chart).
However, the dollar may still show strength (especially at the beginning of the week) due to rising anti-risk sentiment. According to The Washington Post, the White House gave the green light to the Pentagon to launch a large-scale military operation against militants in Yemen. Considering the fact that this information was published on Sunday, the EUR/USD pair may show a bearish gap at the start of trading on Monday. If we confirm the insider information, the safe-haven dollar will be in high demand in the coming days. You may consider short positions after the bears consolidate under the support level of 1.0850 (lower Bollinger Bands line on the daily timeframe, coinciding with the upper boundary of the Kumo cloud).
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