Week Ahead: EURUSD to reach cloud 9?

The world’s most-traded currency pair could reach a fresh 9-month high in the upcoming week, as markets compare the latest policy clues between the US Federal Reserve and the European Central Bank.

To be clear, it’ll be a massive week that extends beyond major central bank decisions (the Bank of England is in action too).

We’ll also see the biggest tech earnings, and even an OPEC+ decision.

In other words, major asset classes are set to be rocked by these major economic data releases and events due in the week ahead:

Monday, January 30

• NZD: New Zealand December external trade
• CNH: Mainland China markets reopen after Lunar New Year
• EUR: Eurozone January economic confidence
• IMF publishes World Economic Outlook update

Tuesday, January 31

• JPY: Japan December unemployment, retail sales, industrial production
• AUD: Australia December retail sales
• CNH: China December industrial profits, January PMIs
• EUR: Eurozone 4Q GDP
• USD: US January consumer confidence
• Exxon Mobil earnings

Wednesday, February 1

• NZD: New Zealand 4Q unemployment
• CNH: China Caixin manufacturing PMI
• EUR: Eurozone January CPI and manufacturing PMI, December unemployment
• GBP: UK January manufacturing PMI
• Brent: OPEC+ meeting
• USD: Fed rate decision
• Meta earnings

Thursday, February 2

• EUR: European Central Bank rate decision
• GBP: Bank of England rate decision
• USD: US weekly initial jobless claims
• S&P 500: Earnings from Alphabet, Apple, and Amazon

Friday, February 3

• CNH: China January services/composite PMI
• USD: US nonfarm payrolls report

 

Here’s what markets currently expect for next week’s Fed meeting:

• Fed will hike by 25 basis points (bps) on February 1st.
   
• Fed will hike again by a further 25 bps sometime after next week’s meeting, but no later than June 2023.
   
• Those two hikes would bring US interest rates from the current 4.5% up to around 5%.
   
• The Fed will then keep its benchmark rate at around that 5% mark for a while, before cutting interest rates later this year.

 

On the ECB side of the equation:

• ECB to hike by 50bps next week – double the expected size of the Fed’s upcoming hike.
   
• The ECB is forecasted to have another 75bps in hikes more to go through mid-year.

 

In fewer words:

• Fed = 50 bps hikes total remaining (including next week’s 25bps hike)

• ECB = 125 bps hikes total remaining (including next week’s 50bps hike)

 

This idea that the ECB has more rate hikes in store relative to the Fed is what’s been propelling EURUSD to its highest levels since April 2022.

 

However, note that EURUSD’s surge is consolidating just below a key Fibonacci level – the 50% line from its January 2021 through September 2022 descent.

The price action suggests that the next move for EURUSD may well depend greatly on what either the ECB or Fed reveals next week.

 

Potential scenarios for EURUSD:

• EURUSD could be pushed into “cloud 9” if the ECB persists with its hawkish stance, while the Fed starts warming up to the idea of pausing its own rate hikes (or at least markets do not believe any hawkish tones emanating out of the Fed next week).
  
  Such an outcome is also likely to invoke further cheer across other asset classes, from stocks to gold, and even crypto.
  
   
• However, if:
  • the Fed triggers a larger-than-expected 50bps hike next week
  • presses home the message that US interest rates will be sent past the market-forecasted 5% target this year.
  • and markets actually believe the Fed’s hawkish intentions

(or a combo of the above factors)

… that may rapidly unwind some of EURUSD’s recent gains.
 

 

Key support/resistance levels for EURUSD:

SUPPORT

• 1.0770 region: previous cycle low, June 2022 resistance zone
   
• 1.07365: mid-December cycle high
   
• 1.061 region: 38.2% Fib line and around where 50-day simple moving average (SMA) resides

RESISTANCE

• 1.09426: 50% Fib line
   
• 1.112 – 1.114: March 2022 resistance
   
• 1.11848: end-March cycle high

 

At the time of writing, markets are forecasting a 70% chance that EURUSD will trade within the 1.07 – 1.105 range over the next one-week, while the implied-volatility is back to its year-to-date high which saw the latest leg up for EURUSD.

Ultimately, this next big move for the world’s most-traded currency is set to be dictated by what either the Fed or the ECB signals to the markets next week.

 

Make sure you also check back on Monday (January 30th) for our next Trade of the Week (published every Monday), as we then focus on GBPUSD and how it may react to the upcoming policy signals out of the Fed vs. the BOE.

 

Federal Reserve DXY US Dollar Fed rate hike